How to understand… crypto tax filing

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If you own, buy or sell cryptocurrencies, you might need to report those transactions and pay taxes on gains the next time you’re due to file a tax return where you live. In the US, for example, the tax filing deadline is 15 April, while the UK deadline for paper tax returns is 31 October.

What do you need to know if your home country’s tax filing deadline is approaching? Here is an overview of requirements in the UK, US and parts of Europe:

Her Majesty’s Revenue and Customs (HMRC), the department responsible for collecting taxes in the UK, “does not consider cryptoassets to be currency or money”, according to a policy paper published in late 2018. It also divides cryptoassets into three categories: exchange tokens, utility tokens and security tokens.

HMRC’s cryptoassets tax guide considers exchange tokens only, noting that utility and security tokens might require different tax treatment that has yet to be decided. Bitcoin and other commonly traded cryptocurrencies are considered exchange tokens.

If you sell bitcoin or another cryptocurrency for a profit, you’ll be liable for capital gains tax, according to HMRC. In addition, “Individuals will be liable to pay income tax and National Insurance contributions on cryptoassets which they receive from: their employer as a form of non-cash payment [or] mining, transaction confirmation or airdrops.”

In exceptional circumstances where someone trades cryptocurrencies with “such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself”, income tax might take priority over capital gains tax, and HMRC would tax any profits or losses as it would for any other business.

HRMC also provides additional tax guidance for cryptocurrency traders who gain new assets through forking, are claiming losses on an asset that has lost all value, have lost their private key or were defrauded.

In the US, the Internal Revenue Service (IRS) treats cryptocurrencies as property, and taxes crypto transactions accordingly. So, for example, if you sell bitcoin for more than you paid, you would be liable for reporting that as a short-term capital gain on your tax return. (Losses should also be reported, and can offset gains elsewhere on your taxable income.)

Likewise, if you’re paid for goods or services in cryptocurrencies, you’re required to report the fair market value of the currencies at the time of receipt as part of your income.

Cryptocurrency miners must report the fair market value of their currencies as self-employment income and are liable for the corresponding self-employment tax.
Even payments made in cryptocurrencies can be subject to taxation.

“A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property,” the IRS FAQ on cryptocurrencies states. “For example, a person who in the course of a trade or business makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a US non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee. Examples of payments of fixed and determinable income include rent, salaries, wages, premiums, annuities, and compensation.”

Across most of Europe, “there are no specific tax laws on the taxation of cryptocurrencies”, notes the law firm Osborne Clarke. So tax liabilities for cryptocurrency users depend on “general principles and any guidance issued by Tax Authorities”.

In France, for example, cryptocurrencies are considered intangible assets, so any profits made from one-off investments are taxed as capital gains at the rate of 36.2 per cent (19 per cent flat tax rate plus 17.2 per cent tax for social contributions). Profits for speculators and miners, on the other hand, are “treated as industrial and commercial profits subject to the progressive income tax schedule (45 per cent of marginal plus social contributions)”.

In Germany, gains or losses from cryptocurrency trading are treated for tax purposes like the disposal of any other private assets. However, such transactions involving private assets are exempt from taxation if they’re valued at less than €600, according to German law firm/tax advisory Winheller.

For tax guidance in other countries, it’s best to consult your national tax authority or a tax preparation specialist who’s familiar with cryptocurrencies.

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