A beginner's guide to filing cryptocurrency taxes in the US, UK and Germany
Does one have to pay tax on cryptocurrency?
Most taxes imposed on cryptocurrency are based on an Internal Revenue Service (IRS) ruling in 2014. According to the ruling, cryptocurrency should be treated similarly to stocks or bonds — as a capital asset. This means that it should be taxed whenever sold at a profit.
For example, if a person purchases something using cryptocurrency, and the amount they spent has further gained in value compared to the purchase price, their spending will incur cryptocurrency capital gains tax.
Per IRS rulings, here’s how it works:
- For discussion purposes, let’s say a crypto investor, Ben, bought $50 worth of Bitcoin (BTC). He held on to it, allowing it to rise to $500 in value.
- He then uses the $500 to purchase clothes, for example. He would then owe capital gains taxes on the $450 profit his initial $50 purchase earned.
- Technically, Ben spent the Bitcoin. However, the IRS still considers the profit from his initial purchase taxable.
According to University of North Carolina Tax Center research director and associate professor Jeff Hoopes, the IRS’s taxing of crypto as a capital asset is because most people treat crypto as an investment.
What are capital gains and capital losses?
A person owes cryptocurrency tax if they sell or spend it while realizing a profit. If crypto is spent or sold at a loss, they wouldn’t need to pay taxes. To understand how cryptocurrency taxes work, let’s go through the following examples:
- If one bought $5,000 worth of BTC and sold it for $10,000, they would have a taxable gain of $5,000.
- If one bought $5,000 worth of BTC and sold it for $3,000, they would not owe any taxes. Their $2,000 in Bitcoin losses could also be used to offset other investment gains.
The following sections will discuss cryptocurrency taxes in the U.S., U.K. and Germany. Although all countries impose similar rulings, some variations may be worth noting, depending on location.
Cryptocurrency tax norms
When Satoshi Nakamoto published the white paper on Bitcoin, the U.S. Congress also passed legislation that increased financial brokers’ tax reporting requirements. Under this law, financial firms were required to supply the taxpayers and the IRS with information on their tax documents.
Under the said ruling, companies are forced to calculate on a “cost basis.” This is the difference between the original purchase price and the sale proceeds of a particular asset. As such, the amount would then determine tax obligations. This is similar to the cryptocurrency capital gains tax of today.
Because the IRS classifies cryptocurrency as property (not currency), buying and selling crypto is taxable under U.S. law. As such, tax rules applicable to property likewise apply to Bitcoin, Ether (ETH) and other cryptocurrencies. Technically, only tax rules that apply to property transactions apply, not real estate tax rules.
The IRS also penalizes failure to report income from crypto sales, with 2019 tax return forms marking the inclusion of a yes-or-no question concerning crypto transactions.
Cryptocurrency tax rate as per Federal Law:
- For short-term capital gains: 10 to 37%
- For long-term capital gains: 0 to 20%
Crypto-asset gains in the U.S. are calculated based on the person’s income, as well as the holding period for cryptocurrency. Technically, the holding period for crypto starts on the purchase or transaction date. It then continues to the day of the sale, trade or transaction when it is disposed of as a capital asset.
Cryptocurrency coins with a holding period of 365 days or less are subject to short-term capital gains tax and will be taxed as ordinary income. For example, the short-term capital gains tax brackets for 2023 are as follows:
Meanwhile, cryptocurrency held for more than 365 days are subject to long-term capital gains tax rates. The long-term capital gains tax brackets for 2023 are as follows:
In the U.K., His Majesty’s Revenue and Customs (HMRC) has a “Cryptoassets Manual,” which details how to file cryptocurrency taxes. Like the U.S., the U.K. does not consider cryptocurrency money or currency.
HMRC classifies cryptocurrencies into four categories:
- Exchange tokens: These tokens are used as a mode of payment. Bitcoin is a type of exchange token.
- Security tokens: Tokens with interests or rights in business. Examples of these rights are ownership, entitlement to shares in future profits, or repayment of money.
- Utility tokens: Utility tokens provide access to goods or services accessible via a platform, usually using distributed ledger technology (DLT).
- Stablecoins: These are crypto assets with values pegged to that of fiat money or exchange-traded commodities.
Anyone who holds cryptocurrency assets as a personal investment will then be taxed on any profits realized on such assets. Individuals with such assets must also pay taxes for cryptocurrencies received via airdrop, mining, confirmation rewards and salary from an employer.
Unless the donation is more than the acquisition cost, crypto assets donated to charity do not apply to capital gains tax. Capital losses from crypto may also be considered for the tax liability. If the cryptocurrency is sold for less than the acquisition amount, the loss can be deducted to reduce the overall capital gain.
Lastly, exchanges of crypto for fiat currency, as well as exchanges of crypto for another type of crypto, are considered taxable events.
Simply put, anything that makes you profit in your crypto portfolio makes you liable for tax.
As per HMRC, cryptocurrency may be subject to capital gains tax and income tax in the U.K., depending on the transaction type. There is a £12,570 tax-free allowance in the U.K. for 2023, so capital gains from crypto over this allowance will be subjected to a 20% to 40% tax rate.
Additional income from cryptocurrency over this personal allowance plus over the higher rate income band will likewise be subjected to a tax rate of 45%. The exact amount is calculated depending on the type of transaction, what specific tax type applies and the income tax band one falls under.
Unlike the U.S., the U.K. does not have short-term and long-term capital gains tax rates. All capital gains depend on one’s income tax band:
Germany can be considered one of the most crypto-friendly nations in terms of taxation. Under the German Tax Acts, Bitcoin and other cryptocurrencies are treated as private money. As per the German Federal Central Tax Office or Bundeszentralamt für Steuern (BZSt), cryptocurrency is not treated as property, foreign currency or legal tender. Because the country considers crypto private money, its laws favor long-term, buy-and-hold investors.
For all European Union member states, the Bundesfinanzministerium or Federal Ministry of Finance has likewise ruled that cryptocurrency transactions conducted by individuals need not be subjected to Value Added Taxes (VAT).
Under German law, small transactions fall under tax law 23 EStG. According to the BZSt, short-term capital gains from cryptocurrency or assets held less than a year are subject to income tax. Additional income from cryptocurrencies, such as mining or staking, is also subject to income tax in Germany.
The tax rate for crypto is the same as regular income tax rates, which is 45% plus 5.5% Solidarity Tax. However, cryptocurrency profits under €600 are exempted from tax (for individuals). In addition, individually-held crypto is VAT-exempt in Germany and assets held for over a year do not incur a tax liability on earnings.
In short, long-term holdings are tax-free, even if one’s cryptocurrency assets increase in value.
When do you need to pay cryptocurrency taxes?
Taxable events that affect a person’s crypto investments must be reported on one’s taxes. A taxable event is any event wherein a person realizes or triggers crypto profits.
In the U.S., taxable events fall under two categories:
- Capital gains tax events
- Income tax events
These two tax events are taxed differently, so it’s essential to understand the events that fall under each one:
Capital gains tax events
The short-term and long term capital gain tax events are as follows:
- Using cryptocurrency to purchase goods or services
- Selling cryptocurrency for fiat money (dollars, euros, pounds etc.)
- Trading and swapping cryptocurrency for another type of cryptocurrency
Note that transferring assets from one wallet or exchange to another does not trigger capital gains or losses, and is therefore not a taxable event.
Income tax events
The IRS has continually updated taxable income tax events to include newer crypto-related income-earning methods. As such, income tax events include:
- Receiving cryptocurrency via airdrop
- Receiving interest in cryptocurrency from decentralized finance
- Receiving payment in crypto for completing a task
- Earning cryptocurrency mining income from block rewards and transaction fees
- Earning cryptocurrency from liquidity pools and staking
- Receiving new coins from hard forks
- Crypto referral bonuses
- Earning interest from lending protocols
- Earning new governance, reward or liquidity pool tokens
In addition, there are several earn-to-engage platforms from which one’s earnings may be considered as income. While the IRS has not yet articulated these events in a formal ruling, it’s likely these would also be considered taxable events:
- Rewards from learn-to-earn campaigns
- Rewards from watch-to-earn platforms
- Rewards from browse-to-earn platforms
- Rewards from play-to-earn games
- Rewards from shop-to-earn browser extensions
Meanwhile, non-taxable events are as follows:
- Donating cryptocurrency to a tax-exempt nonprofit or charity organization
- If cryptocurrency is bought with cash, and then just held or kept
- Transferring cryptocurrency from wallet to wallet
- Creating a nonfungible token (NFT)
- Gifting cryptocurrency (allowance is under $17,000 per person in 2023)
Depending on one’s total income, up to 20% can also be deducted from long-term capital tax gains. Losses incurred from trading can also be carried forward to the next tax year or used to offset capital gains.
In the U.K., a person only needs to pay capital gains tax on overall gains above the annual exempt amount. However, the gains still need to be reported on one’s tax return, regardless of the amount.
Quite similar to the U.S., individuals are subject to cryptocurrency income tax received or earned via the following methods or events:
- Selling cryptocurrency for fiat currency
- Trading a cryptocurrency for another cryptocurrency, including fiat-backed stablecoins
- Spending cryptocurrency on goods and services
- Gifting cryptocurrency to someone other than a spouse or civil partner
- Adding or removing crypto from a liquidity pool
- Staking cryptocurrency through a protocol
- Cryptocurrency mining
- Receiving an airdrop
- Confirmation rewards
- Salary from an employer
- Profits from a crypto trading business
On the other hand, if crypto assets aren’t traded, then in the eyes of the HMRC, they are not taxable.
Simply put, no disposal or sale equals no tax due, regardless of the amount you’ve invested in crypto. However, exchanges of cryptocurrency to cryptocurrency are subject to capital gains tax because it’s seen as a disposal. Furthermore, the HMRC receives information from cryptocurrency exchanges.
In cases where the buying and selling of cryptocurrency results in profit, the HMRC might qualify it as trading and subject it to income tax. Under U.K. law, profits from trading are subject to up to 45% income tax, not capital gains tax. Examples of these are mining and staking.
As for businesses, they need to pay taxes on activities involving token exchange. For example:
- Buying and selling of exchange tokens
- Exchanging tokens for other types of crypto assets
- Providing goods or services in exchange for tokens
Cryptocurrency is considered an ordinary intangible asset in Germany. As such, section 23 of the German Income Tax Act details the treatment of speculative transactions made with private currency.
If cryptocurrency is sold within a holding period of less than one year, it will be subjected to income taxes in Germany. As for crypto trading, the net amount that is gained or lost at the time the asset is sold is the amount that is taxed as income. This also applies to cryptocurrency traded for another or fiat currency.
It is worth noting, however, that crypto-assets considered financial instruments (futures, swaps) will not have their gains or losses net against passive crypto investments.
Cryptocurrency mined by individuals is likewise taxed. Under Section 23 of the Income Tax Act, this is considered taxable under ‘other income.’ The taxable amount is the net profit of the cryptocurrency. For example, a Bitcoin miner is taxed at the sale price of his cryptocurrency during the time of sale, netting mining costs.
When goods and services are purchased using cryptocurrency, it is considered trading in Germany and is therefore taxable. Like IRS rules, the German Federal Central Tax Office (BZSt) will tax disposals (even if they are purchases) as long as the original amount has increased in value.
To summarize, one might pay tax on crypto gains when:
- Selling cryptocurrency within the same year of purchasing it and earning a profit of more than €600
- Selling cryptocurrency used in staking that earned interest within ten years of purchasing said crypto
- Swapping cryptocurrency for another cryptocurrency
- Spending crypto on goods and services
On the other hand, one does not have to pay tax on crypto gains when:
- Selling cryptocurrency after a year or more of purchasing it
- Making a profit of less than €600 from a cryptocurrency sale
- Selling cryptocurrency used in staking after ten years of purchasing it
How to pay cryptocurrency taxes
The U.S. has a lot of platforms that make filing and paying crypto taxes easier. Some of these are TaxBit, Accointing, Koinly, CoinTracker and TokenTax — among others. Individuals with complicated crypto taxes may also seek an accountant’s help to ensure everything is in order whenever it’s time to file and pay taxes. Otherwise, taxpayers can report their cryptocurrency gains to the IRS using Form 8949, and report them on their Form 1040 tax return through Schedule D.
A tax return must be filed with the HMRC to disclose one’s income. It’s quite similar to filing other taxes on earnings — the key is in keeping records of trading gains and losses. Taxpayers should also calculate how much they owe as soon as possible to pay whatever is due by Jan. 31.
They can also hire an accountant or a tax adviser if their tax situation is too complicated for do-it-yourself filing. As for capital gains and losses, they can be reported on supplementary pages SA108 of one’s SA100 tax return.
Crypto activity in terms of income and profits must be declared in one’s annual tax return, or Einkommensteuererklärung, in Germany. It’s reported in the same way as regular income.
One must calculate their crypto tax using an app, personal records or consulting an accountant. After this, the BZSt has an online tax platform on which they can easily file their taxes. Crypto activity may also be declared on paper and posted on tax forms to a local tax office or Finanzamt.
The forms to use are:
- Hauptformular ESt 1 A: For general income
- Anlage SO: For crypto income
How can one prepare for the crypto tax period?
The best advice is preparation. Taxpayers with crypto assets should meticulously record all their transactions to readily compute how much they owe come tax season. No matter where one is, these tips hold for a hassle-free tax season.
- Keep a detailed record of all cryptocurrency-related activities
- Calculate capital gains and losses using a tax calculator
- Familiarize oneself with the forms that must be filled out and submitted come filing season
- Submit forms and pay any tax owed on or before the deadline
Penalties for undeclared Bitcoin
Under the IRS’ ruling, willful failure to report anything (including crypto) on a tax return is a criminal offense and is considered tax evasion. It is up to the IRS investigators to decide whether the omission was willful or not. In any case, penalties can run as high as 75% of the understatement of tax. Jail time may also need to be served.
Likewise, the HMRC imposes penalties of up to 200% of any tax due, plus a 20% capital gains tax with interest. Failure to report crypto assets in the U.K. is considered tax evasion and is punishable by law via criminal charges or jail terms.
In Germany, crypto tax evasion is also punishable by law and can cover up to 14 years past the end of the year during which the tax debt originated.
Donating, gifting or inheriting cryptocurrencies
Gifting and donating cryptocurrencies are non-taxable transactions for both the giver and the receiver. However, the IRS taxes donations to non-tax-exempt organizations. Gifts that are below $17,000 are not taxable. As for inherited crypto assets, they are subject to the same estate regulations as other assets.