Key Takeaways
In many countries, trading, spending, and selling digital assets are taxable events. To calculate your taxes, you must consider your capital gains and losses.
You may also have to pay income taxes on your crypto holdings if you receive them as payment or rewards.
Every jurisdiction is different, so make sure to consult a tax advisor to help you calculate and understand your taxes.
Brokers and exchanges are typically obliged to cooperate with tax authorities to help them track transactions of crypto and other digital assets.
Anyone found guilty of tax evasion can be slapped with significant financial penalties and even harsher punishments.
Introduction
If you HODL or trade crypto, you'll probably have to pay taxes at some point. The exact percentage varies among countries, but generally, it's common for tax authorities to treat digital assets (including cryptocurrencies, stablecoins, and NFTs) as capital assets (property). Paying your designated taxes is a legal obligation, so there’s no room for error.
In this article, we'll cover some basic principles that apply to crypto taxation. While the regulatory framework differs from one country to another, authorities like the US IRS have issued final regulations solidifying reporting rules. In any case, we recommend consulting a local tax professional.
Do I Have to Pay Taxes When I Buy or Sell Crypto?
There's no single right answer to this question. Your taxes will depend on your location, how long you've held your digital assets, and the type of activity you engage in, among other factors. As a general rule, you'll likely need to pay taxes or offset losses for selling, but not when you buy crypto.
In the United States, compliance starts with the "Digital Asset Question." On federal forms like Form 1040, you must check a box answering "Yes" or "No" regarding whether you received, sold, exchanged, or disposed of a digital asset during the year. You must answer "Yes" if you engaged in taxable transactions, but can answer "No" if you simply held assets or transferred them between your own wallets.
It's your responsibility to keep track of your taxable gains and losses and pay the right amount of tax according to your country’s regulatory framework.
What’s a Taxable Event?
A taxable event is a transaction or activity on which you're required to pay taxes. These events aren’t universal — what’s a taxable event in one country might not be in another. Typically, transactions involving the sale of commodities, investments, and other capital assets are taxable. Purchasing digital currencies like Bitcoin or BNB using fiat currency is unlikely to be a taxable event. However, selling or trading your crypto is very likely to be taxed.
A taxable event will leave you with capital gains (profit) or capital losses. If an asset you're holding appreciates and you trade it for a profit, you've made capital gains. If you trade or sell that asset at a loss, you've incurred capital losses.
In the US, you calculate capital gains and losses using tax forms like the Form 8949 and Schedule D. To help calculate this, taxpayers should note the date, cost basis (purchase price), sale value, and fees associated with all trading transactions.
What Are Taxable and Non-taxable Events?
Taxable events may include:
Selling digital assets for fiat currency (i.e., USD, CAD, EUR, JPY, etc.).
Trading one digital asset for another (e.g., BTC for ETH, or using stablecoins).
Spending cryptocurrencies. In certain jurisdictions, directly spending your crypto on goods or services triggers a capital gain or loss just like selling the asset.
Receiving cryptocurrency as a result of mining, a fork, or an airdrop.
Receiving staking rewards or payment for services (taxed as ordinary income).
The following are generally not considered taxable events:
Buying digital assets with fiat currency (except in cases where the purchase price is lower than the fair market value of the purchased coin).
Donating cryptocurrency to a tax-exempt organization (this may also provide a charitable deduction).
Gifting cryptocurrency under a specific limit (taxes generally apply only when you sell the asset).
Transferring cryptocurrency from one wallet to another, as long as you own both.
How Is Cryptocurrency Taxed?
Bitcoin and other digital assets' official classification in a country will determine how they're taxed. In some countries, they are treated as property rather than currency.
Your Bitcoin or other crypto income may also count as income tax. If you're a full-time employee, freelancer, or crypto trader paid in crypto, you’re likely liable to pay income tax on your crypto earnings. This includes income from mining or staking rewards. Again, the income tax rate usually depends on how much you earn.
How Do I Calculate My Taxes?
If you've bought crypto, HODLed, and sold it later, your tax liability should be fairly easy to calculate. Let's use a hypothetical country, X, as an example. We must first calculate our capital gains or losses (in US dollars). The formula is as follows:
Fair market value - cost basis = Capital gain / loss
The fair market value is the current spot price you'd find on an exchange like Binance. The cost basis is the original price you paid for the asset plus any fees.
Imagine you bought 2 BTC for $10,000 each and sold them two years later for $30,000 each. You've now made $40,000 in capital gains:
$60,000 (fair market value) - $20,000 (cost basis) = $40,000 (capital gains)
Your capital gains tax can depend on your total taxable income, tax-filing status, and the amount of time you've held the asset in question. For example, if you've held crypto for over a year, you might be subject to long-term capital gains tax.
Note: Typically, tax brackets and income thresholds are adjusted annually for inflation. Consult the current year's tax tables in your region for accurate rates.
If you trade regularly, your calculations will require more work. The tax consequences of fiat purchases and sales are relatively easy to understand, but it gets more complicated when trading one cryptocurrency for another.
Accountants generally use Specific Identification or FIFO (First In, First Out) to calculate this. While FIFO is the default method used by the IRS if no other method is chosen, Specific Identification allows you to choose exactly which units you are selling (e.g., the ones with the highest cost basis) to minimize your capital gains, provided you have adequate records.
With Specific Identification, you could choose to sell the asset you bought at the highest price first to lower your tax bill. If you do not specify which units you are selling, you must use the FIFO method, where the oldest assets are sold first.
You can deduct your capital losses from your capital gains to calculate how much you owe in a tax year. In many countries, short-term capital gains and losses (typically from holdings that are under a year old) are treated separately from long-term gains and losses.
How Do Tax Authorities Know About My Crypto Holdings?
Tax authorities in various jurisdictions have begun to track cryptocurrency transactions and enforce tax compliance years ago. Large cryptocurrency exchanges are also obligated to cooperate with authorities.
For example, US regulations require brokers, including exchanges and payment processors, to report digital asset proceeds to the IRS using the Form 1099-DA. This reporting requirement begins for transactions taking place in 2025. This means the IRS will receive direct reports of US residents’ digital asset sales and exchanges, similar to how stock sales are reported.
Governments also use data analytics tools such as Chainalysis to track cryptocurrency activity. With enough information, they can tie blockchain transactions on regulated cryptocurrency exchanges to personal crypto wallets.
What Happens if I Don’t File My Cryptocurrency Taxes?
In many countries, tax authorities require you to file your taxes regularly. This can be the case even if you owe zero taxes or are entitled to a refund. Failure to file can result in fees, penalties, interest, confiscated refunds, audits, and even jail time.
Closing Thoughts
Calculating your taxes correctly and paying them on time are essential life skills. That’s why we recommend engaging a professional tax advisor to ensure you don’t make any mistakes. This may be the case if you’ve been trading and not just investing. The tax implications of regular trading are much more complicated. Bear in mind that your specific tax requirements are highly dependent on the applicable regulations where you live.
Further Reading
Disclaimer: Binance does not provide tax or financial advice. Depending on the country's tax framework, when you trade commodities and the event produces capital gains (or losses), you may have to pay taxes. The regulatory framework for taxation of cryptocurrencies differs from country to country, hence we strongly advise you to contact your personal tax advisor for further information about your personal tax circumstances. It is your personal responsibility to select the correct tax jurisdiction that applies to you.
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