The saying goes that the only certainties in life are death and taxes. For years, crypto traders and investors were able to avoid taxes, as the new asset class was small enough to fly under the radar of the tax authorities and there were no rules that explicitly applied to it.

More recently, however, crypto has grown large enough to attract interest from regulators. Most jurisdictions now have a framework for deciding how crypto trades (including NFTs) should be taxed. They have also published guidance on activities like staking, liquidity provision and yield farming, airdrops, and hard forks.

Moreover, the authorities are cracking down on tax evasion in the crypto sector, with exchanges being required to share information with revenue offices in different jurisdictions. If you’ve traded crypto on any regulated exchange in the last few years, the likelihood is that your tax office knows about it. Many traders in the US have already been sent letters by the IRS encouraging them to declare any gains they have made for tax purposes.

Assuming crypto is legal in your country, then, there’s a good chance you’ll need to pay tax on your crypto investments.

Even if we were qualified tax specialists (which we’re not), it would be impossible in an article like this to give a full overview of exactly what taxes you’ll need to pay as a crypto user. Each jurisdiction’s treatment is different, and there are several different taxes that may or may not apply to your activities in the space.

What we can do is give an overview of how the tax authorities have decided to approach crypto in general, with some examples, and encourage you to check the specific guidance for your country – and ask a tax accountant who is familiar with the crypto sector if you’re in any doubt.

Income Tax

In most jurisdictions, receipt of earnings in the form of crypto will be subject to tax at the normal rate of income tax. That is, it doesn’t matter if you earn your living in dollars, euros, BTC, or NFTs: you will be due tax on those earnings at the equivalent value in your local currency at the point you get paid. (I.e. if you receive 4 ETH as payment for work in the DeFi industry, and ETH is worth $2,000, that counts as $8,000 of earnings and is taxed as such.) Typically your earnings will be taxed on a sliding scale, and the more you earn the more tax you’ll pay proportionately. The exact rate will depend on your tax regime.

The crypto industry includes several activities that you may not have realised count as earnings. Both mining and staking are likely to be included, with tax due on any value after you have taken costs into account (electricity, hardware, server hosting, etc).

Airdrops are a point of potential complication, and this is one area where you’ll want to check the guidance for your jurisdiction carefully – especially as airdrops can be worth thousands of dollars. You may not have to pay tax on an airdrop, particularly if you have not done anything to actively earn it (for example, if you received tokens just for using the platform). In other instances, if you have contributed to a bounty programme or similar, the airdrop is more likely to count as earnings.

Whether or not you have to pay tax on the initial amount transferred to you, if you sell your airdrop tokens at a later date, you’ll probably be liable for capital gains tax (CGT, see further below).

If you’re buying and selling crypto for profit, then in most cases CGT will be the relevant tax. However, if you’re a professional trader, or you’re making a lot of short-term trades, then it’s possible that your activity will fall under earnings and be taxed as income – check the guidance from your tax authority to be sure.

Sales Tax

Most countries levy a sales tax of ‘value-added tax’ or ‘consumption tax’ on many goods and services (generally excluding necessities like food). This is a kind of indirect tax that is charged on the price of the product at each stage in its lifecycle, from production, through distribution, and ultimately sale. In Australia, it is known as Goods and Services Tax (GST). In the UK and EU, it’s Value Added Tax (VAT). The United States does not have a specific consumption tax, but sales taxes are set at the state level.

The good news is that sales tax is not due on crypto in most jurisdictions. Australia was a pioneer in this regard in stating that crypto was not subject to GST. India, unfortunately, is an unusual case, with punitive rates of VAT due for purchases of crypto.

Capital Gains Tax

As a crypto trader or investor, the tax you’re most likely to encounter is capital gains tax. This is the tax payable on any profits you make from buying and selling crypto. (If you’re making very frequent and short-term buys and sells as an active trader, then it’s possible your profits will be classed as income, though this won’t be the case for most people.)

In most cases, calculating your gains is straightforward: it’s simply the profit you make when you buy low and sell high. It’s also worth knowing that any losses you’ve made from unprofitable trades can offset your gains, reducing the amount of tax you pay. For example, if you bought 5 BTC at $400 each in 2014 and sold them at $40,000 in 2021, then your capital gain is $200,000 – $2,000 = $198,000. But if you also buy 3 ETH at $3,500 each and sell them at $2,500 in the same year, then you make a loss of $3,000, which can be deducted from your gains.

So far, so good, but there can be complicating factors.

Firstly, if you’re like many crypto users, then you may have made hundreds or even thousands of trades over the course of a year. You will need to track your profit and loss across these, which can be extremely complex – especially if you are trading many different cryptos across multiple exchanges. Coinbase has provided some useful information to help you find out which information you need to submit, with documents you can download. If you’re using many exchanges and chains, there are applications like Koinly and Accointing that can automate the process of calculating your gains for tax purposes by plugging into the different platforms and accounts you use, though it’s worth knowing what information you’ll need to provide ahead of time, because different services will support different blockchains, exchanges, and activities.

Secondly, while the broad strokes are simple, the devil is always in the detail. Different jurisdictions have rules that cover specific circumstances around the time frames within which you buy and sell.

For example, some tax authorities have grown wise to a trick employed by many traders, whereby they sell at a loss at the very end of the tax year to reduce their liabilities, then immediately (or within a specified period of time) buy back that crypto the next day so their holdings remain the same. While selling at a loss is a legitimate tax loss harvesting strategy, trying to cheat the system via such ‘wash sales’ is frowned upon in some places but permissible in others.

On the other hand, some jurisdictions essentially reward you for holding crypto for longer, by applying a more favourable tax regime to those trades. In the US, your capital gains tax bill will be impacted by the length of time between purchase and sale. If you have held crypto for less than a year when you sell, your capital gains are taxed at the same rate as your regular income tax (which is dependent on how much you earn). However, if you have held your crypto for more than a year, your CGT liability is significantly lower. This isn’t the case in every country though; in the UK, it doesn’t matter whether you have held your crypto for ten days or ten years – any gains are taxed the same.

Finally, not only is CGT taxed at different rates in different jurisdictions, but a sliding scale is often used – so the greater your profits, the higher your tax band. In the UK, your first £12,300 of gains are tax-free (to be reduced to £6,000 for the 2023-24 tax year). Thereafter, you’ll pay 10%, until your combined income and gains reach £50,270, after which you’ll pay 20%. The Australian system, meanwhile, is more like the US tax regime. CGT is paid at the same rate as income tax, with the first AUD $18,201 being tax free.

It’s not just sales of crypto that trigger a capital gain, but any ‘disposal’. You can think of a disposal as any event where the ownership status of your crypto changes. This includes:

• Sales for fiat currency (the most common event)
• Crypto-to-crypto trades
• Gifting crypto
• Spending (e.g. buying goods and services)
• Theft or permanent loss of crypto, for example due to deleted or corrupted private keys (the burden of proof may be high in these circumstances)

It’s the crypto-to-crypto trades that trip up a lot of traders. If you buy BTC at $20,000 and trade it for ETH at $40,000/BTC, that’s a $20,000 capital gain per BTC. Many crypto users assume they will only have to pay tax when they cash out to fiat. That is generally not correct.

Inheritance Tax

This is one that may not have occurred to you, but if you receive crypto as an inheritance, then – again depending on your jurisdiction – you may need to pay tax on it. Similarly, if you’re looking to pass on your crypto to your family in the event of your own death, there will be tax implications.

Tax Wrappers

Many countries have various tax “wrappers” that allow people to invest a certain sum of money every year, tax free, so long as you keep certain rules. Self-managed pension funds are one of the most popular examples. For instance, Australia has self-managed superannuation funds (SMSFs), while the USA has self-directed Individual Retirement Accounts (IRAs) or Roth IRAs. In both cases, you are able to invest crypto in these, and manage your investments, provided you meet specific reporting criteria. (The UK has Self-Invested Personal Pensions, or SIPPs, but it is not yet possible to invest crypto in these.)

Because these are pension funds, you will not be able to withdraw money from them until you reach retirement age. Depending on where you live, there may be other types of tax wrapper that enable you to invest with a reduced tax burden. Generally, corporation tax is lower than individual tax, so if crypto is part of your business, then forming a company and holding digital assets within that can be a way to reduce your tax bill.

Conclusion

Tax will be an inescapable reality for many crypto traders and investors. The good news is that in most jurisdictions, the tax framework is now clear and not overly burdensome. Moreover, there are ways you can reduce your bill, easily and legally. If in any doubt, talk to a qualified tax specialist who understands the crypto sector. While you’ll pay for this advice, it can save you far more in tax than you spend on the consultation itself.

Do:

• Expect to pay tax on your crypto trades and investments
• Keep good records
• Sign up for crypto tax accounting software if your trades are complicated
• Lock in losses to reduce your bill

Don’t

• Forget to include crypto in your tax return!
• Assume the authorities are unaware you own crypto
• Try to game the system by wash trading
• Panic – a lot of people are in the same position as you