Cryptocurrencies are designed to be decentralized and unregulated currencies, but that hasn't stopped governments from imposing regulations. While cryptocurrencies are designed for transactions, there's little doubt that there's more speculation than transaction in the market. Governments have responded with very different tax classifications.
With the dramatic rise in cryptocurrency valuations over the past several years, governments have sought to ensure that everyone is paying their fair share. The United States Internal Revenue Service, for example, has subpoenaed major exchanges, like Coinbase, for lists of their largest clients to ensure they’ve paid capital gains taxes.
Let's take a look at how cryptocurrency taxes function and how different countries treat these assets.
How Cryptocurrency is Taxed
The United States Internal Revenue Service considers cryptocurrencies to be property since most people treat it as an investment rather than a currency. Like a stock or a bond, anyone that purchases the property must pay capital gains tax. These rates differ depending on the individual's tax bracket and how long they have held the virtual currency.
In the European Union, countries have greater latitude when it comes to classifying cryptocurrencies. Switzerland classifies cryptocurrency as a foreign currency, which means that it doesn't charge capital gains or sales tax. Germany doesn't charge capital gains or sales tax, but it does charge a progressive tax if crypto is sold within a year.
The United Kingdom takes a different approach by classifying cryptocurrency as an asset or private money on a case-by-case basis. The government generally collects capital gains taxes, but the determination of asset versus private money is made on a case-by-case basis in court. Of course, this causes a lot more uncertainty among cryptocurrency users.
These taxes are constantly evolving as regulators wrap their heads around the implications for cryptocurrencies. For example, several U.S. Congressmen sent a letter to the IRS demanding that they provide clearer guidance on confusing cryptocurrency issues, such as calculating the cost basis and accounting for special transactions like hard forks.
Countries with the Lowest Tax
There are several countries that don't charge any taxes on select cryptocurrency transactions for individuals and/or businesses. In some cases, these exemptions only apply to long-term cryptocurrency holders and/or those that don't run cryptocurrency businesses, such as cryptocurrency mining, day trading operations and related businesses.
These cryptocurrency tax havens include:
- Singapore doesn't charge any tax to individuals or businesses that hold cryptocurrencies over the long-term.
- Portugal residents don't owe any VAT or personal income taxes on cryptocurrency gains, although businesses may owe taxes.
- Malta doesn't charge any taxes on cryptocurrencies that are held over the long-term, though short-term trades are taxed.
- Malaysia doesn't charge any capital gains taxes and its 2019 budget didn't include any changes to those laws.
- Belarus legalized cryptocurrencies and exempted them from taxes until at least 2023.
- Switzerland doesn't charge any taxes for individuals that invest and trade cryptocurrencies in personal accounts.
It's important to keep in mind that cryptocurrency regulations are always changing. If you're thinking of moving or re-domiciling a business, you should carefully consider whether the destination country has actually legalized cryptocurrencies and explicitly laid out the tax treatment, since countries like Malaysia could soon change their tax laws.
How to Minimize Your Taxes
There are many different countries that have low or no cryptocurrency tax, but it's not always practical to move or re-domicile a business to take advantage of these laws. Individuals and companies in countries where tax laws aren't as generous must ensure that they comply with these laws in order to avoid any spillover into their other assets.
For example, individuals or businesses located in the United States must carefully track their cryptocurrency transactions to accurate calculate capital gains and losses. While this is typically a time-consuming reconciliation process, new software solutions can help automate much of the work and ensure that your tax forms are accurate to avoid an audit.
ZenLedger Automatically Fills Popular Tax Forms - Source: ZenLedger
ZenLedger automatically aggregates cryptocurrency transactions from most major exchanges and offline wallets, calculates capital gains and losses, and even pre-fills popular IRS forms, including Form 1040 Schedule D and Form 8949. Accountants can use the same software to assist their clients in accurately calculating cryptocurrency tax liability with an audit trail.
In addition to accurate reporting, there are many other strategies that you can use to minimize your cryptocurrency taxes. For instance, you could use tax loss harvesting strategies on other assets to realize losses during high-tax years and reduce your overall tax burden. It may also make sense to take advantage of other tax incentives in these years.
It's equally important to take advantage of years where you may have reported cryptocurrency losses. These losses could help offset gains in other parts of your portfolio in order to reduce your overall tax burden at the end of the year. The only caveat is that you should ensure that you’ve paid taxes on past crypto gains before claiming losses to avoid any problems.
The Bottom Line
Cryptocurrencies are designed to be unregulated and decentralized, but that hasn't stopped governments from imposing taxes. Most major governments tax cryptocurrencies on some level, such as the United States and most of Europe, but there are a handful of countries that have very low or no tax on certain qualifying cryptocurrency transactions.
If you live in the United States, sign up for ZenLedger to eliminate ambiguity and ensure that your taxes are accurate. Accountants can also sign up for our platform to manage their cryptocurrency clients in one place and ensure that everything is accurate with an iron-clad audit trail to help you in the event of an audit.