A beginner's guide to filing cryptocurrency taxes in the US, UK and Germany
Do you have to pay tax on cryptocurrency?
Most taxes imposed on cryptocurrency are based on the United States Internal Revenue Service, or IRS, ruling in 2014. According to the ruling, cryptocurrencies should be treated in the same way as stocks or bonds — as a capital asset.
What does this mean for people who own crypto? If crypto is considered a capital asset, then it means that there should be a tax on cryptocurrency whenever it is sold at a profit.
For example, if you purchase something using crypto, and the amount you spent has further gained in value compared to your purchase price, then your spending will incur cryptocurrency capital gains tax.
Here’s how it works, at least as far as the IRS is concerned:
For discussion purposes, let’s say you bought $50 worth of Bitcoin (BTC). You held on to it, allowing it to rise in value to $500.
You then use the $500 to purchase clothes, for example. You would then owe capital gains taxes on the $450 profit that your initial $50 purchase earned.
Technically, you spent the Bitcoin, right? However, the IRS still considers the profit you made from your initial purchase as taxable.
The IRS’ taxing of crypto as a capital asset, according to University of North Carolina (UNC) Tax Center research director and associate professor Jeff Hoopes, is because most people treat crypto as an investment.
What are capital gains and capital losses?
So how do cryptocurrency taxes work? You owe crypto tax if you sell it or spend it while realizing a profit. If crypto is spent or sold at a loss, then you won’t need to pay any taxes. To illustrate:
If you bought $5,000 worth of Bitcoin and sold it for $10,000, you would have a taxable gain of $5,000.
If you bought $5,000 worth of Bitcoin and sold it for $3,000, you would not owe any taxes. Your $2,000 in Bitcoin losses could also be used to offset other investment gains.
In the following sections, we’ll be discussing cryptocurrency taxes in the United States, United Kingdom and Germany. Although all countries impose similar rulings concerning crypto tax, there are still some variations that may be worth noting, depending on your location.
Cryptocurrency tax norms
When Satoshi Nakamoto published his white paper on Bitcoin, the U.S. Congress likewise passed legislation that increased financial brokers’ tax reporting requirements. Under the new law, financial firms were required to supply the taxpayers and the IRS with information on their tax documents.
How does this law relate to cryptocurrency? Under the new ruling, companies were then forced to calculate “cost basis.” This is the difference between the original purchase price and the sale proceeds of a certain asset. As such, the amount would then determine tax obligations.
This is similar to the cryptocurrency capital gains tax that we know of today.
In the following sections, we’ll discuss the tax norms in the U.S., as well as in the U.K. and Germany.
Because the IRS classifies cryptocurrency as property (not currency), under U.S. law, buying and selling crypto is taxable. 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 penalizes failure to report income from crypto sales. 2019 tax returns already included a yes-or-no question concerning crypto transactions, as a matter of fact.
Crypto-asset gains in the United States 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 date of purchase or transaction. It then continues on to the day of the sale, trade, or transaction during which it is disposed of as a capital asset.
Cryptocurrency coins that have 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 2021 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 2021 are as follows:
In the U.K., Her Majesty’s Revenue and Customs (HMRC) has a Cryptoassets Manual that details how to file cryptocurrency taxes. Similar to the U.S., the U.K. does not consider crypto assets as money or currency. They are instead classified into four categories:
Exchange tokens: These tokens are used as a mode of payment. Bitcoin is a type of exchange token.
Security tokens: These are tokens with interests or rights in business. Examples of these rights are ownership, entitlement to shares in future profits, or repayment of a sum 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 that are 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 crypto assets are also required to pay taxes for cryptocurrencies received via airdrop, mining, confirmation rewards and salary from an employer.
Unless the donation is more than the cost of acquisition, crypto assets that are donated to charity do not apply to capital gains tax. Capital losses from crypto may also be considered for tax liability. Meaning that if crypto 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.
Under the German Tax Acts, Bitcoin and other cryptocurrencies are treated as private money. As far as tax is concerned, the German Federal Central Tax Office or Bundeszentralamt für Steuern (BZSt), crypto is not treated as property, foreign currency, or legal tender.
For all European Union member states, the Bundesfinanzministerium (BMF) 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. As such, crypto sales under 600 Euros are exempted from tax (for individuals). For example, purchasing 50 euro worth of Bitcoin and selling it for 150 euro after a few months would not incur any tax liabilities in Germany.
Crypto held for over a year also does not incur a tax liability on earnings. In short, long-term holdings are tax-free, even if your cryptocurrency assets increase in value. For example, if you purchase 200€ worth of Bitcoin and sell it for 500€ after more than a year, the 300€ that you earned would not be taxable.
When do you need to pay cryptocurrency taxes?
Taxable events that affect a person’s crypto investments are required to be reported on one’s taxes. A taxable event is any event wherein a person realizes or triggers crypto profits.
These two tax events are taxed differently, so it’s important 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 and/or services
Selling cryptocurrency for fiat money (dollar, euro, pound sterling and the like)
Trading/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
Income tax events are as follows:
Receiving cryptocurrency via airdrop
Receiving interest in cryptocurrency from decentralized finance (DeFi)
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
Cryptocurrency tax reporting must be done meticulously, especially in the US, where tax events abound. You can always consult a professional, such as an accountant, and check your tax rate using a cryptocurrency tax calculator.
Meanwhile, non-taxable events are as follows:
Donating cryptocurrency to a tax-exempt non-profit or charity organization
If crypto is bought with cash and then just held or kept
Transferring cryptocurrency from wallet to wallet
Note that up to $3,000 can be deducted from your normal income tax depending on how long you’ve held your crypto assets. 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 that go above the annual exempt amount. The current Annual Exempt Amount or tax-free allowance is at 12,300 Great British pounds. 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:
Receiving an airdrop
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 equates to no tax due, regardless of the amount you’ve invested in crypto. Exchanges of crypto to crypto, however, are subject to capital gains tax because it’s seen as a disposal. Furthermore, the HMRC receives information from crypto exchanges.
In cases where the buying and selling of cryptocurrency results in profit, the HMRC might qualify it as trading and will then subject it to income tax. Under UK law, profits from trading are subject to up to 45% income tax (not CGT). Examples of these are mining and staking.
As for businesses, they need to pay tax on activities that involve the exchange of tokens. For example:
Buy and sell of exchange tokens
Exchanging tokens for other types of crypto assets
Providing goods and/or services in exchange for tokens
For more in-depth information on cryptocurrency taxes in the UK, you may read the HMRC’s manual here.
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 crypto 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 applies to cryptocurrency traded for another type of cryptocurrency or fiat currency.
It is worth noting, however, that crypto-assets considered as financial instruments such as futures or swaps will not have their gains or losses be 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 on the cryptocurrency. For example, a Bitcoin miner is taxed at the sale price of his cryptocurrency during the time of sale, netting the costs of mining.
When goods and services are purchased using crypto, it is considered trading crypto in Germany and is therefore taxable. Similar to the IRS rules, the HMRC will tax disposals (even if they are purchases) so long as the original amount has increased in value.
For example, if you purchase 5000 euro of Bitcoin and use it to purchase a 6000 euro bag after it has increased in worth, the 1000 euro will still be taxable as net gain even if you spent it. Holding onto your Bitcoin for a year or more, however, will do away with this tax, which is why a lot of people wait to purchase anything with their Bitcoin.
To summarize, you might pay tax on crypto gains when:
You sell cryptocurrency within the same year of purchasing it and you earn a profit of more than 600€.
You sell cryptocurrency used in staking that earned interest and that you have done this within 10 years of purchasing said crypto.
On the other hand, you won’t pay tax on crypto gains when:
You sell your cryptocurrency after a year or more of purchasing it.
Your profit from a cryptocurrency sale is less than 600€.
You sell cryptocurrency used in staking after 10 years of purchasing it.
How to pay your 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 should enlist the help of an accountant to ensure that everything is in order whenever it’s time to file and pay taxes.
TaxBit has a great guide for reporting crypto gains on tax returns. Otherwise, you can report your cryptocurrency gains to the IRS using Form 8949 and report them on your Form 1040 tax return through Schedule D. You can also refer to the IRS’ website for more information on crypto-related taxes.
A tax return needs to 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. You should also calculate how much you owe as soon as possible so you can pay whatever is due come Jan. 31.
You can also hire an accountant or a tax adviser if your crypto 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 your 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.
All you have to do is calculate your crypto tax by using an app, your records, or consulting an accountant. Afterwhich, the BZSt has an online tax platform on which you can easily file your taxes.
This is called Elektronische Steuererklärung or ELSTER. 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
Which country has the least cryptocurrency taxes?
Germany can be considered one of the most crypto-friendly nations in terms of taxation. Because the country regards crypto as private money, its laws favor long-term, buy-and-hold investors.
Tips on preparing for the crypto tax period
The best advice is preparation. If you have crypto assets, keep a meticulous record of all your transactions so you can readily compute how much you owe come tax season. No matter where you are in the world, these tips hold true for a hassle-free tax season.
Keep a detailed record of all your cryptocurrency-related activities.
Calculate your capital gains and losses using a tax calculator.
Familiarize yourself with the forms you’ll need to fill out and submit come filing season.
Submit your forms and pay any tax owed on or before the deadline.
Penalties for undeclared Bitcoin
Under 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 $15,000 are not taxable. As for inherited crypto assets, they are subject to the same estate regulations as other assets.