Summary

In many countries, cryptocurrencies must be taxed. Trading, spending or selling cryptocurrency is generally a taxable event. Capital gains and losses must be taken into account when calculating taxes. Taxes may also be payable if cryptocurrency payments are received.

Tax laws vary from jurisdiction to jurisdiction, so be sure to consult a tax advisor. Tax authorities often work with cryptocurrency exchanges to track cryptocurrency transactions. If you attempt to evade taxes, you will eventually face financial penalties or even more severe penalties.

Introduction

If you hold cryptocurrencies for a long time or do not trade them regularly, you may also end up paying corresponding taxes. The exact amount of tax payable varies by country, but tax authorities generally treat cryptocurrency assets as capital assets. Therefore, you must pay taxes in full and on time and fulfill your tax obligations in accordance with the law.

This article will cover some basic principles that apply to paying taxes on most cryptocurrencies. Since regulatory frameworks for taxing cryptocurrencies vary from country to country, we always recommend that individuals consult a local tax professional.

Do I need to pay taxes if I buy or sell cryptocurrencies?

There is no unified answer to this question. Whether or not you pay taxes is determined by a combination of factors such as your location, how long you have held cryptocurrency, and the type of activity you engage in. Generally speaking, there is no tax on the purchase of cryptocurrencies, but taxes or losses will be credited when selling.

Cryptocurrency taxation is complicated. For emerging assets such as cryptocurrency, tax authorities are still improving regulations. However, individuals are responsible for recording their own taxable gains and losses and paying tax in full in accordance with their country's regulatory framework.

What is a taxable event?

A taxable event is a transaction or activity for which an individual must pay tax. There is no uniform standard for these events. Regulations vary from country to country. Generally speaking, transactions involving the sale of goods, investments and other capital assets are taxable. Purchasing digital currencies such as Bitcoin or Binance Coin using fiat currency is not necessarily a taxable event. However, selling or trading cryptocurrencies may be taxable.

A taxable event results in a capital gain (profit) or capital loss for an individual. If the asset you hold appreciates in value and you make a profit on the trade, you will receive a capital gain. Conversely, trading or selling assets at a loss will result in a capital loss.

Whether a capital gain is a taxable event also depends on the rules of the tax authority where the individual is located. If capital losses can be deducted from capital gains, the amount of tax paid can be reduced. The total tax amount depends largely on the sum of the above items. To accurately calculate total taxes, individuals should record the date, cost basis (purchase price), sales volume, and other related expenses of all transactions.

What are taxable and non-taxable events?

Taxable events generally include:

1. Sell cryptocurrencies and exchange them for fiat currency (i.e. USD, CAD, EUR, JPY, etc.).

2. Transactions between two cryptocurrencies (eg: Bitcoin to Ethereum).

3. Spend cryptocurrency. In jurisdictions such as the United States, United Kingdom, Canada, and Australia, taxes will arise if cryptocurrencies are used directly to purchase goods or services and generate profits.

4. Obtain cryptocurrency through forks, airdrops or mining.

On the other hand, the following situations generally do not qualify as taxable events:

1. Use fiat currency to purchase cryptocurrencies (exceptions: the purchase price is less than the fair market value of the token purchased).

2. Donate cryptocurrency to a tax-exempt organization.

3. Give away cryptocurrencies up to a certain limit.

4. Transfer cryptocurrencies between wallets in your name.

How are cryptocurrencies taxed?

How a country legally defines the nature of Bitcoin and other cryptocurrencies determines how it is taxed. Tax authorities generally classify cryptocurrencies as capital assets rather than currencies. If the country/region has not yet enacted a specific cryptocurrency tax bill, the income from cryptocurrency will be taxed according to the official designated method (if any). Some jurisdictions take a simpler approach. For example: Germany does not tax cryptocurrencies held for more than one year. Malaysia, Portugal and Singapore also have very lenient cryptocurrency tax policies.

Bitcoin or cryptocurrency income may also be included in income tax brackets. Full-time employees, freelancers or cryptocurrency traders who are compensated in cryptocurrency must pay income tax on cryptocurrency gains, with the specific rate also usually determined by the amount of income.

If certain income thresholds are not met, no income tax is payable. Income is usually divided into different brackets, that is, the higher the income, the higher the tax rate and the increased income tax paid. If your main income comes from trading, find out whether you need to pay capital gains or income tax.

How are taxes calculated?

If you simply buy a cryptocurrency, hold it for the long term and sell it later, it's easy to figure out the tax liability. Let's simply take the United States as an example. First, calculate the capital gain or capital loss in U.S. dollars. The formula is as follows:

Fair market value - cost basis = capital gain or loss

Fair market value refers to the current spot price, which can be checked through trading platforms such as Binance. Cost basis is equal to the original price of the asset purchased plus any fees.

Assuming that 2 Bitcoins are purchased for $10,000 each and sold two years later for $30,000 each, the capital gain is $40,000:

$60,000 (fair market value) - $20,000 (cost basis) = $40,000 (capital gain)

In the United States, capital gains tax depends on total taxable income, tax filing status, and how long the asset has been held. If you hold cryptocurrencies for more than a year, you are taxed as long-term capital gains.

The amount of tax paid depends on total taxable income, which includes capital gains. If you have accumulated taxable income of $50,000, plus the capital gains mentioned above, your total taxable income is $90,000. According to the chart below published by the IRS, individuals will pay tax on cryptocurrency gains at a capital gains rate of 15%.

There are more steps to calculate taxes on recurring transactions. The taxes and fees arising from the purchase and sale of fiat currencies are relatively easy to understand, but transactions between cryptocurrencies are much more complicated. Let’s take Binance Coin and Ethereum (ETH) trading as an example. The following is the transaction record:

In this example, trading Ethereum for Binance Coin is a taxable event, requiring capital gains and losses to be calculated. Capital gain equals fair market value ($500) minus cost basis. However, which transaction should be used as the cost basis? After purchasing Binance Coin at two different prices, you need to decide how to calculate it.

Accountants use two calculation methods: the first-in, first-out (FIFO) method and the last-in-first-out (LIFO) principle. Most countries/regions use the first-in-first-out (FIFO) principle as the standard, and the last-in-first-out (LIFO) principle as another selection method, which is basically only used in the United States. According to the first-in, first-out principle, the assets purchased first will be sold or traded first. In this example, Binance Coin purchased for $150 will be sold first.

Following the first-in, first-out (FIFO) principle, the cost basis for this taxable event is $150. According to the formula, the capital gain is calculated as US$350 as the basis for tax filing:

$500 (fair market value) - $150 (cost basis) = $350 (capital gain)

On a last-in-first-out (LIFO) basis, recently purchased assets will be sold or traded first. In this example, the $300 purchased for 1 Binance Coin is the cost basis, and the capital gain is $200.

$500 (fair market value) - $300 (cost basis) = $200 (capital gain)

Capital losses are deducted from capital gains to calculate the tax owed for the tax year. In many countries, short-term capital gains and losses (the holding period is usually less than one year) are treated separately from long-term capital gains and losses.

How do tax authorities keep track of an individual’s cryptocurrency situation?

Tax authorities such as the US Internal Revenue Service (IRS), Australian Taxation Office (ATO), Canada Revenue Agency (CRA) and Her Majesty's Revenue and Customs (HMRC) track cryptocurrency transactions and enforce tax compliance. Large cryptocurrency exchanges will also cooperate with authorities.

Government departments can use data analysis tools such as Chainanalysis to accurately locate cryptocurrency users. By gathering sufficient information, authorities can link blockchain transactions from regulated cryptocurrency exchanges to personal cryptocurrency wallets. These tools can even analyze layers of data deleted from trading platforms to combat tax evasion.

The U.S. Internal Revenue Service (IRS), along with major tax authorities, has established partnerships with other government agencies, academic institutions, and governments to share information on cryptocurrency usage.

What are the consequences of not filing cryptocurrency taxes?

Tax authorities in many countries require individuals to file tax returns regularly, and even zero returns or tax refund returns must be completed on time. If taxpayers fail to file returns on time, they will face additional fees, fines, late fees, confiscation of tax refunds, audits, and even jail time.

Binance Tax Preparation Tool

The Binance tax reporting tool can record cryptocurrency activities and generate reports for users through API to meet the tax reporting requirements of the jurisdiction. To learn more, read how to file taxes through the Binance API tool.

Summarize

It is a citizen's obligation to pay taxes in full and on time. Therefore, if you have any doubts about your tax bill calculations, we recommend that you seek professional help. If you are involved in ongoing trading, not just investing, you should obtain professional advice. The tax issues for frequent transactions are more complex. But most importantly, tax recognition situations are largely determined by where an individual lives. Please keep this in mind when using our information.

Disclaimer

Binance does not provide tax or financial advice. Depending on your country's tax regulatory framework, taxes may be payable if capital gains (or losses) arise from traded commodities and specific events. Cryptocurrency tax regulatory frameworks vary across countries. We strongly recommend that users contact a personal tax advisor to gain a deeper understanding of their personal tax situation. It is the user's responsibility to select the correct tax jurisdiction based on their own circumstances.