Everything You Need to Know About Cryptocurrency Tax in 2023

The rapid surge in cryptocurrency value has attracted the attention of regulators around the world that have made significant efforts to identify and verify crypto users, tracking the exchange of fiat currency to crypto and visa versa.

While cryptocurrency provides users with complete sovereignty over their finances, it doesn’t make them exempt from taxation — cryptocurrency is now legally recognized as a taxable asset in most countries. If you buy or sell a cryptocurrency, it’s highly likely that you’ll need to pay close attention to your tax obligations.

Cryptocurrency tax can get complicated, however. Different countries use different classification systems to determine when and why cryptocurrency users should pay tax. This article will break down general tax obligations for cryptocurrency investors across the US, UK, the EU, Australia, Canada, and New Zealand. 

How Crypto Tax Works

Cryptocurrency tax fundamentals are relatively straightforward — if you generate a profit from cryptocurrency, you’ll need to pay tax on it. 

Buying cryptocurrency and selling it for a profit when prices increase creates simple tax situations in which capital gains tax applies, but some crypto-related activities — such as mining or staking— can get more complicated.

Most taxation authorities around the world treat cryptocurrency as property. The IRS, for example, treats cryptocurrency as property for tax purposes, as does the Australian Taxation Office, EU member countries, the Canada Revenue Agency, and other major tax authorities.

In simple terms, this means that cryptocurrency is treated in the same manner as precious metals, stocks, or real estate in most cases. An important exception to this rule occurs when a business generates cryptocurrency as part of activities such as mining, staking, or through crypto loans. In most cases, crypto generated through these activities is treated as income.

Crypto Capital Gains Tax Basics

If you invest in cryptocurrency in the same way you’d invest in real estate, precious metals, or stocks, then the trade or disposal of cryptocurrency is likely to be subject to capital gains tax. 

Determining whether you need to pay capital gains tax on your cryptocurrency is simple. If you purchase cryptocurrency and sell it at a later date when it increases in value, the gains you generate are treated as a capital gain.

If you purchase cryptocurrency and sell it later when the price is lower, it’s possible that you may be able to deduct a capital loss against other capital gains you may have made. Capital gains tax is applicable to a variety of events, which can include:

• Trading one cryptocurrency for another
• Selling cryptocurrency for fiat currency
• Purchasing goods and services with cryptocurrency 

It’s important to note that capital gains tax is generally only applied to crypto used to pay for goods and services if the buyer is using cryptocurrency that was purchased and held as an investment. A buyer that purchases cryptocurrency and immediately uses it to purchase goods and services is generally not likely to create a tax event that is subject to capital gains tax.

Not all cryptocurrency activities are subject to capital gains tax — the following crypto transactions are generally not subject to capital gains tax in most jurisdictions:

• Buying cryptocurrency with fiat currency
• Transferring cryptocurrency you own between wallets you own, such as moving crypto from an exchange to a hardware wallet
• Donating cryptocurrency to tax-exempt charities
• Gifting small amounts of cryptocurrency under a certain threshold
• Lending cryptocurrency through DeFi platforms or crypto-backed loans — interest generated through loans is typically treated as income
• Cryptocurrency captured through mining, airdrops, or forks — this is generally subject to income tax

Reporting Crypto Capital Gains

Reporting cryptocurrency capital gains is highly important. Many tax authorities have created task forces focused on identifying and auditing cryptocurrency holders in order to ensure that they are fulfilling their tax obligations. 

Crypto capital gains tax reporting requirements vary across different jurisdictions, but all share similar basic requirements. Crypto traders and investors must ensure that every single cryptocurrency transaction they make is logged, including details of how much cryptocurrency is moved or traded, the date of the transaction, and the wallets the cryptocurrency is moved between.

Cryptocurrency tax automation software significantly reduces the amount of time required to log cryptocurrency transactions. CryptoTrader.Tax, for example, integrates with major exchanges to automatically collect and classify cryptocurrency transactions, then automatically generate reports for taxation.

Crypto Mining & Staking Tax

Unlike crypto trading, cryptocurrency mining is not subject to capital gains tax in most jurisdictions. Instead, the cryptocurrency generated from cryptocurrency mining or staking is treated as income and is therefore subject to income tax. 

An important distinction is made between mining or staking as a business, or mining or staking as a hobby. Hobby mining, for example, is taxed differently from business mining. Tax authorities use a variety of criteria to determine whether crypto activities are business or hobby related, which include:

• Whether or not the activity is carried out in a business-like manner
• The amount of profit generated from the activity
• An individuals’ history of profit or loss related to cryptocurrency activities
• The amount of time, effort, and planning dedicated to the activity.

In most jurisdictions, cryptocurrency generated from mining or staking is classed as income and is therefore subject to income tax. 

Forks, Airdrops, & Tax

Cryptocurrency forks and airdrops often provide crypto holders with additional cryptocurrency that can dramatically appreciate in value for no initial cost — but that doesn’t mean that the crypto received from airdrops or forks is tax-free.

Cryptocurrencies gained from airdrops or hard forks are typically subject to income tax on receipt and then capital gains tax on disposal. A crypto holder that received Bitcoin Cash when the Bitcoin blockchain forked in August 2017 would recognize income for the fair market value of that Bitcoin Cash.

Crypto Loans & DeFi Tax

Decentralized finance, or DeFi, is a relatively new application of blockchain technology that allows cryptocurrency users to access a wide variety of traditional financial services emulated via cryptocurrency. 

DeFi allows users to lock up crypto holdings through loans or liquidity pools in order to generate profit, often in the form of interest. Lending your cryptocurrency in return for interest generates income that, in most jurisdictions, is subject to income tax. 

Key Takeaways

Keeping track of your cryptocurrency tax obligations is important — tax authorities around the world are highly aware of the amount of capital currently flowing through the cryptocurrency market and now dedicate significant resources toward identifying and auditing crypto holders.

Using crypto tax tracking software and consulting with a professional tax advisor in order to create an effective crypto tax strategy can assist in reducing your crypto tax obligations and ensure that you remain tax compliant.