It can be difficult to ascertain, at least in most jurisdictions around the world, how getting involved with Bitcoin, altcoins and other forms of blockchain assets will affect your tax obligations. The majority of tax agencies have yet to issue guidelines, and the rest have left many questions unanswered.
The lack of clear Bitcoin tax guidelines, however, is no excuse for not at least attempting to have your tax records in order, if you are mining, buying, holding or selling cryptocurrencies.
The most basic and critical piece of information you need to have when trying to work out your Bitcoin taxes is an understanding of how the relevant agencies in your jurisdiction classify cryptocurrencies.
Fortunately, most tax agencies around the world have elected to classify digital currencies either as property or as currency. This difference in approach leads to two distinct tax regimes when applying existing rules.
Bitcoin as property
In Australia, the tax agency considers Bitcoin to be property. The Australian Tax Office has published guidance on its official website that offers an overview on how it treats Bitcoin and other cryptocurrencies for taxation purposes.
A “property” classification puts Bitcoin in the same category as real estate or collectables, such as art and precious metals. When Bitcoin is considered property, selling it or spending it attracts capital gains tax.
The Australian tax office has resolved the double-taxation problem that Bitcoin users still face in other parts of the world. Australians no longer have to pay goods and services taxes (GST) on both purchases of the digital currency and when using it to pay for goods and services. As of 1 July 2017, purchases of Bitcoin have not been subject to GST in Australia.
In March 2014 in the US, the Internal Revenue Service (IRS), issued a statement referred to as Notice 2014-36 that announced and explained its decision to classify Bitcoin as property.
Notice 2014-36 does not offer a comprehensive guide on Bitcoin taxation in the US. It only addresses federal tax obligations. Each of the 50 states is free to outline their own Bitcoin taxation plan. Several have done so.
Before the Trump tax bill was signed into law in late 2017, capital gains tax on Bitcoin in the US could be deferred, if some or all of the funds received from a sale were reinvested in ‘like-kind property’. This meant you could sell bitcoins and defer the capital gains accrued by trading it for other cryptocurrencies (formerly considered like-kind property). Every sale or spending of cryptocurrencies, however, is now a taxable event.
Many who hold bitcoin consider it a currency, and indeed thousands of merchants both online and offline accept it as a payment method. In Australia, using bitcoin to pay for goods and services is considered barter trade, which has its own tax regime. In the US, purchases using bitcoin attract capital gains tax.
Another country that treats Bitcoin as property for taxation purposes is Canada.
Bitcoin as currency
In countries where tax agencies classify bitcoin as a form of currency, users are obligated to pay income tax when they receive it. Meanwhile, selling the cryptocurrency is treated as an ordinary currency exchange.
Paying merchants for goods and services in such jurisdictions attracts value-added tax (VAT) or sales tax, just as fiat currency transactions do.
The UK tax body, Her Majesty’s Revenue and Customs (HMRC), treats Bitcoin as a form of a foreign fiat currency. It does not tax bitcoin-related activities, such as mining. Where cryptocurrency is used to buy goods and services, the tax agency treats it the same as any foreign fiat currency.
The European Union has taken a view similar to the UK. In October 2015, the Court of Justice of the European Union issued a ruling urging member states to treat virtual currencies such as bitcoin as a means of payment. The ruling makes the use of bitcoin exempt from value-added tax.
Whether Bitcoin is taxed as property or currency, the process can be complicated, depending on where you live. In some areas of the world, you may face double or even triple taxation on a single transaction. For example, you may be liable for both value-added or income tax and capital gains tax at the same time.
In the US, even though Bitcoin is not classified as a currency, you still have to pay income tax when you earn it through selling goods and services. You also have to pay capital gains tax on that same cryptocurrency when you buy something with it or sell it. In addition, you may also be subject to additional state taxation.
To ease the process, you may need to keep detailed records of all your bitcoin transactions. Correct tax filing comes with meticulous record keeping of all your crypto trades and transactions.
You may want to consider the services of a tax expert who specialises in cryptocurrency taxes. Unfortunately, few accountants have sufficient experience with cryptocurrencies to offer competent help. Ask or call around in your local area. This situation will likely change with time.
Meanwhile, you could opt to use online Bitcoin tax calculators, such as Bitcoin.tax and Libratax.com. These online applications take the information you feed them, calculate how much tax you are required to pay, and compile necessary tax forms.
As Bitcoin goes mainstream, more tax agencies will issue guidelines. And those that have already done so will offer even more nuanced classifications. It is therefore important to stay on top of changes in the bitcoin tax laws of your area.