TL;DR - SUMMARY
In many countries, cryptocurrencies are subject to tax. Trading, spending or selling your crypto is often a taxable event. To calculate your taxes, you will need to consider your capital gains and losses. You may also have to pay income taxes if you receive crypto as payment.
Each jurisdiction is different, so be sure to consult a tax advisor. Tax authorities frequently cooperate with crypto exchanges to track crypto transactions. If you try to evade taxes, you can end up with financial penalties and even harsher punishments.
Introduction
If you HODL or trade, at some point, you will probably have to pay crypto taxes. The exact amount varies between countries, but it is common for tax authorities to treat crypto assets as capital assets. It is a legal obligation to pay the required taxes, so doing it right is important.
In this article, we'll cover some basic principles that apply to crypto taxes in general. Because the regulatory framework for cryptocurrency taxation differs by country, we always recommend consulting a local tax professional.
Do I have to pay taxes when I buy or sell crypto?
There is no single answer to this question. Your taxes will depend on your location, how long you've held your crypto, the type of activity you're doing, and other factors. In general, you'll probably have to pay taxes or offset losses when you sell, but not when you buy.
Cryptocurrency taxes are not always simple. As a fairly new asset, tax authorities are still developing regulations on crypto. However, it is your responsibility to track your taxable profits and losses, and pay the correct amount of taxes, according to your country's regulatory framework.
What is a taxable event?
A taxable event is a transaction or activity on which you must pay taxes. These events are not universal. A taxable event in one country may not be taxable in another. Generally, transactions involving the sale of raw materials, investments, and other capital assets are subject to tax. Purchasing digital currencies like Bitcoin or BNB with fiat currency is unlikely to be a taxable event. However, selling or trading your crypto will likely be subject to taxes.
A taxable event will leave you with capital gains or capital losses. If an asset you own appreciates and you trade it for a profit, you have made capital gains. If you make a trade or sell that asset at a loss, you have incurred capital losses.
Again, whether capital gains are a taxable event depends on the local tax authority. You may be able to deduct capital losses from your capital gains to reduce your taxes. Your total amount of taxes depends largely on the sum of these. To help calculate this, taxpayers should note the date, cost basis (purchase price), sales value, and commissions associated with all trading transactions.
What are taxable and non-taxable events?
In general terms, taxable events include:
1. Selling cryptocurrencies for fiat (i.e. USD, CAD, EUR, JPY, etc.).
2. Trade cryptocurrencies for another cryptocurrency (for example, BTC for ETH).
3. Spend cryptocurrencies. In jurisdictions like the US, UK, Canada and Australia, directly spending your cryptocurrencies on goods or services may incur taxes if you make a profit.
4. Receive cryptocurrency as a result of a fork, airdrop or mining.
On the other hand, the following are generally not considered taxable events:
1. Buy cryptocurrency with fiat (except in cases where the purchase price is less than the fair market value of the purchased currency).
2. Donate cryptocurrency to a tax-exempt organization.
3. Give away cryptocurrencies under a specific limit.
4. Transfer cryptocurrency from a wallet you own to another wallet you own.
How are cryptocurrencies taxed?
The official classification of Bitcoin and other cryptocurrencies within a country will determine how they are taxed. Tax authorities commonly count cryptocurrencies as a capital asset and not a currency. If your country has not passed specific crypto tax laws, expect your crypto earnings to be taxed according to your official designation (if applicable). Some jurisdictions take a much simpler approach. Germany, for example, has no taxes on cryptocurrencies held for more than a year. Malaysia, Portugal and Singapore also have very liberal crypto tax rules.
Your Bitcoin or crypto income can also count as income tax. If you are a full-time employee, freelancer, or cryptocurrency trader who gets paid in cryptocurrencies, you will likely have to pay income taxes on your crypto earnings. Again, the income tax rate generally depends on the amount you earn.
Below a certain income threshold, you may not pay taxes on your income. Typically, you'll find different income brackets, with increasingly higher brackets paying higher tax rates. If your main income comes from trading, find out if you are subject to capital gains taxes or income taxes.
How do I calculate my taxes?
If you bought cryptocurrency, HOLD it, and sold it later, your tax liability should be fairly easy to calculate. Let's look at a simplified example based on the US. First, we need to calculate our capital gains or losses in US dollars. This is the formula:
Fair Market Value - Cost Basis = Capital Gain/LossFair market value is the current spot price you would find on an exchange like Binance. The cost basis is the original price you paid for the asset plus commissions.
Imagine you bought 2 BTC for 10,000 USD and sold them two years later for 30,000 USD. Now you have made 40,000 USD in capital gains:
60,000 USD (fair market value) - 20,000 USD (cost basis) = 40,000 USD (capital gains)In the US, capital gains tax depends on your total taxable income, tax filing status, and the amount of time you have held the asset. If you've held your crypto for more than a year, you're subject to long-term capital gains tax.
The amount you pay depends on your total taxable income. This figure includes your capital gains. If you already have $50,000 of taxable income, your total taxable income will be $90,000, including your capital gains. According to the IRS chart below, you'll pay a 15% capital gains tax rate on your cryptocurrency earnings.
If you trade regularly, your calculations will require some work. It is easier to understand the tax consequences of buying and selling in fiat, but it becomes more complicated when exchanging one cryptocurrency for another. Let's imagine that you have been trading BNB and Ether (ETH). Here is your trading history:
In our example, exchanging your BNB for ETH counts as a taxable event, so you need to calculate your capital gains and losses. Your capital gains are the fair market value ($500) minus the cost basis. But what transaction do we use as a cost basis? After previously purchasing BNB at two different prices, you have to make a decision.
Accountants use two different ways to calculate this: first in, first out (FIFO) and last in, first out (LIFO). FIFO is the standard for most countries, while LIFO is generally only used as an alternative method in the US. With FIFO, the asset you bought first is sold or exchanged first. In our case, we would first sell 1 BNB purchased for 150 USD.
Using FIFO, the cost basis of our taxable event is $150. This leaves us with $350 in capital gains to pay out according to our formula:
$500 (fair market value) - $150 (cost basis) = $350 (capital gains)With LIFO, the most recently purchased asset is sold or exchanged first. Instead, LIFO would use purchasing 1 BNB for $300 as the cost basis. In this case, your capital gains would be $200.
$500 (fair market value) - $300 (cost basis) = $200 (capital gains)You can deduct your capital losses from capital gains to calculate how much you owe in a tax year. In many countries, short-term capital gains and losses (usually holding less than one year) are treated separately from long-term gains and losses.
How do the tax authorities know about my cryptocurrency?
Tax authorities such as the IRS, ATO, CRA, HMRC and others track cryptocurrency transactions and enforce tax compliance. Large cryptocurrency exchanges also cooperate with authorities.
Governments use data analysis tools like Chainanalysis to identify cryptocurrency users. With enough information, they can link blockchain transactions from regulated cryptocurrency exchanges to personal crypto wallets. These analyzes even include multiple layers removed from exchanges to combat tax evasion.
The IRS and other tax authorities also partner and share data with other government agencies, academic institutions, and international governments to share information about cryptocurrency use.
What happens if I don't file my cryptocurrency taxes?
In many countries, tax authorities require that you file your taxes regularly. This may be the case even if you don't owe taxes or need a refund. Failure to file can result in fees, fines, interest, confiscated refunds, audits, and even jail time.
Binance API Tax Filing Tool
Binance's tax filing tool allows you to track your crypto activity. You can generate a report through an API and use it to ensure you are complying with your jurisdiction's requirements. For more information, see How to get tax returns on Binance and FAQ.
In conclusion
Getting your taxes done right is essential. That's why we recommend getting professional help calculating your tax bill if you have any questions. This may be the case if you have been trading and not just investing. The tax implications of regular trading are much more complicated. But the most important thing is that your tax situation depends largely on where you live. Make sure you use our information with that in mind.
Disclaimer
Binance does not provide tax or financial advice. Depending on the country's regulatory framework, when you trade commodities and the event results in capital gains (or losses), you should pay taxes appropriately. The regulatory framework for the taxation of cryptocurrencies differs from country to country, so we strongly recommend that you contact your personal tax advisor for more information regarding your personal tax circumstances. It is your personal responsibility to select the correct tax jurisdiction that applies to you.