Crypto-assets are now taxable income. Aside from a handful of countries that have made cryptocurrencies, such as Bitcoin, illegal, many governments have taken a far more progressive approach. Because countries have recognized the value of cryptocurrencies, they have implemented new regulations for the taxation of revenue earned from cryptocurrencies.
For the most part, this means that in countries such as Canada, the United Kingdom, and the United States, when you sell cryptocurrency on a Bitcoin exchange or peer-to-peer, the income you gain will be subject to capital gains tax.
This article considers the regulations in Canada, the UK, and the US. Each country will have specific regulations set forth. This article is a not comprehensive exposition of each country’s tax implications Bitcoin. You must educate yourself about the regulations and implications of the government you are required to pay taxes to.
HMRC and UK Government: Income Tax v. Capital Gains
If you are taxed in the UK, then you may need to pay income tax or capital gains on your cryptocurrency, or both. What you will owe depends on precisely how you use and hold crypto-assets.
That means, if you accept payment from your employer or services rendered in cryptocurrency, then this is considered taxable income. You must also pay income tax on crypto-services rendered, such as: mining rewards, the collection of transaction fees, as well as profits from airdrops and trading.
Capital gains from crypto-assets are also taxable income but are determined based on different parameters. As with traditional assets, capital gains taxes are only applied when you sell your cryptocurrency for fiat currency, and there is an appreciable value.
This means that in the UK, you can buy and sell Bitcoin with other cryptocurrencies without necessarily being taxed. However, once the digital asset is traded for fiat currency, it becomes subject to taxation laws. The value of the digital asset is based on the value of the pound sterling at the time of the sale.
The same goes for Canada and the United States. However, as we will see, there are differences as to what degree crypto-assets are considered income tax.
Tax implications to note from HMRC: Capital Gains Tax, sections 275 and 275A of the Taxation of Chargeable Gains Act 1992 provide rules to determine when particular digital assets are taxable in the UK. These regulations rarely apply to exchange tokens.
Canada Revenue Agency
CRA does not consider cryptocurrencies legal tender. Therefore you do not need to register all of your cryptocurrency transactions or exchanges with them. The UK and Canada have similar taxation laws.
However, one of the significant differences is that because the CRA does not treat cryptocurrencies as a legal tender, many transactions using cryptocurrency will be treated as barter transactions. That means that many exchanges for goods and services can remain safely off the books.
When cryptocurrencies are used more like traditional commodities, then they become subject to taxation. This is the case for both business income and capital gains, as well as capital losses.
Specific examples of when cryptocurrency becomes taxable are as follows:
- In the event of a sale or gift in cryptocurrency. At which point, the CRA uses the fair market value to determine the value in CAD.
- Capital gains (or losses) must be accounted for in the event of a trade or exchange cryptocurrency.
- When cryptocurrency is cashed out in order to receive CAD or other fiat currencies.
- Or when cryptocurrencies are used to pay for your business that operates with cryptocurrency, and it is outside of the standards of barter transactions.
Finally, you are considered to run a business with taxable income if you participate in cryptocurrency mining, trading, or buy and sell cryptocurrency on crypto-exchanges.
The IRS and USA
Finally, while the IRS does not consider Bitcoin or other cryptocurrencies legal tender either, digital currencies are treated as real property. The value of any cryptocurrency asset is valued based on fair market value. You must also declare any income received from the exchange of cryptocurrencies for any fiat currencies.
It is also worth noting that any transaction that is valued at $600 USD or more must be reported. For more information concerning the specifics of virtual assets, the IRS has issued IRS Notice 2014-21 and IRB 2014-16. These offer specific guidance for individuals and businesses using cryptocurrencies.