President-elect Donald Trump has suggested the removal of capital gains taxes on cryptocurrencies issued by companies based in the U.S., which could position the U.S. as a central hub for cryptocurrency investments.
If enacted, this policy could drastically alter the global perception and trading of cryptocurrencies. However, it must still pass through the legislative process.
What are capital gains taxes, and what does a favorable tax policy mean for you as a cryptocurrency investor? Let's find out.
What are capital gains taxes on cryptocurrency?
Capital gains refer to the profit earned from selling an asset at a higher price than its purchase cost. The difference between the purchase price (cost basis) and the selling price is the taxable gain.
Capital gains tax is a tax imposed on the profit earned from the sale of an asset, such as real estate, stocks, or cryptocurrency. The tax is calculated based on the difference between the asset's purchase price (cost basis) and its selling price.
Cryptocurrencies are treated as property for tax purposes. You may trigger a taxable event when you sell, exchange, or use crypto to pay for goods or services. The amount of capital gain (or loss) depends on the cryptocurrency's price at the time of the transaction compared to its original purchase price.
Example: You bought 1 Bitcoin for $60,000 and later sold it for $100,000. Your capital gain is $100,000 - $60,000 = $40,000, subject to taxation.
Short-term vs. long-term capital gains
Short-term capital gains are obtained from selling or exchanging cryptocurrency held for one year or less. They're taxed based on your income tax bracket (e.g., 10% to 37% in the U.S.), i.e., the same rate as your ordinary income (e.g., wages or salary).
For example, you purchased 1 Bitcoin at $50,000 and sold it 6 months later at $120,000. Your gain was $125,000 - $60,000 = $65,000. If your income tax rate is 24%, you owe $65,000 × 0.24 = $15,600 in taxes.
Long-term capital gains are obtained from selling or exchanging cryptocurrency held for more than one year. Depending on your income bracket and jurisdiction, they're taxed at lower rates, 0%, 15%, or 20% in the U.S.
For example, you purchased 1 Ethereum at $2000 and sold it 2 years later at $4,000. Your gain was $4000 - $2000 = $2000. If your long-term rate is 15%, you owe $2,000 × 0.15 = $300 in taxes.
Holding cryptocurrency for over a year can significantly reduce your tax burden, making long-term investments more tax-efficient. And what's a better place to hold it securely than in Tangem Wallet?
Taxable events in cryptocurrency
Taxable events refer to specific actions or transactions that trigger a tax liability. Depending on the nature of the transaction and local tax regulations, these events result in capital gains, losses, or taxable income. Let's go over them.
- Selling cryptocurrency for fiat currency
If you sell Bitcoin, Ethereum, or any other cryptocurrency for a government-issued currency (e.g., USD, EUR), the profit or loss is subject to capital gains tax. Example: Bought 1 Bitcoin for $70,000, sold for $100,000. The $30,000 gain is taxable.
- Exchanging one cryptocurrency for another
Swapping crypto (e.g., SUI for SOL) triggers a taxable event. The fair market value of the crypto received is compared to the cost basis of the crypto sold. Example: You bought 1 ETH for $2,000 and exchanged it for Bitcoin when the ETH was worth $3,000. The $1,000 gain is taxable.
- Using cryptocurrency to pay for goods or services
When you use crypto to purchase items or services, the difference between the crypto’s fair market value at the time of payment and its cost basis is a taxable gain or loss. Example: You bought 0.1 BTC for $2,000 and used it for a laptop when 0.1 BTC was worth $2,500. The $500 gain is taxable.
- Earning cryptocurrency as income
Crypto earned through mining, staking rewards, freelance work, or other income-generating activities is taxable as ordinary income at its fair market value when received. Example: Received staking rewards of 0.05 SOL worth $100. You must report $100 as income.
- Receiving airdrops and hard forks
Airdrops are free cryptocurrencies distributed as part of promotional campaigns or blockchain projects. Receiving free tokens through an airdrop or a network fork is taxable as income based on the fair market value at the time of receipt, i.e., when it hits your account. Forks are new cryptocurrencies generated from a blockchain split (e.g., Bitcoin Cash from Bitcoin).
If you sell, exchange, or use the mined, staked, airdropped, or forked cryptocurrency, any additional gain or loss relative to its fair market value when you received it is treated as a capital gain or loss. Example: If you received 10 tokens in an airdrop worth $10 each, you report $100 as income.
- Staking and mining
Cryptocurrency earned through staking or mining is taxable income. Mining rewards are treated as ordinary income at the cryptocurrency's fair market value at the time it is mined. However, some jurisdictions may also impose self-employment taxes on mining income if treated as a business activity. Your staking rewards are taxed as ordinary income based on their fair market value when you receive them.
Non-taxable cryptocurrency events
Certain cryptocurrency activities typically do not trigger taxable events. These include:
- Buying cryptocurrency with fiat currency. Buying crypto directly using fiat currencies (e.g., USD, EUR) is generally not taxable, as it is considered an exchange of cash for an asset.
- Transferring crypto between personal wallets. Moving cryptocurrency from one wallet you own to another (e.g., from an exchange to a Tangem Wallet) does not create a taxable event, as no sale or profit is realized.
- Holding cryptocurrency without selling. Simply holding cryptocurrency without converting it to fiat or another crypto is non-taxable, as no gains or losses are realized until a transaction occurs.
How to report cryptocurrency taxes
So, how do you file your capital gains tax? Here's how to manage the process effectively:
Keep accurate records: Maintain detailed records of all your cryptocurrency transactions. Key information to track includes the type of transaction (buy, sell, trade, staking rewards, etc.), the date of each transaction, and the value of the cryptocurrency in fiat at the time of each transaction.
Using crypto tax reporting tools or software can simplify this process by automatically tracking and categorizing your transactions across multiple wallets and exchanges.
Filing with the right forms and documents: You’ll need to complete specific tax forms depending on your location. For example:
- United States: Use IRS Form 8949 to report capital gains and losses from crypto transactions. Include details of each taxable event, such as selling or exchanging crypto.
- Staking and Mining Income: Declare any staking rewards, mining income, or airdrops as taxable income, typically on Schedule 1 of your U.S. tax return.
Other countries may require equivalent forms, such as the Self-Assessment Tax Return in the UK or Form T1135 in Canada, for foreign property reporting.
Proper preparation and tools will make tax season far less stressful and help you avoid potential penalties.
How to use the XPUB key for crypto taxes
An Extended Public Key (XPUB) lets you view all addresses and transactions within a cryptocurrency wallet without accessing private keys. This feature is handy for tax reporting, enabling comprehensive tracking of your crypto activities. Here's how to use an XPUB key for crypto tax purposes:
- Get your XPUB key: Go to the token page in Tangem Wallet. Tap the three dots in the upper-right corner and then tap Generate XPUB.
- Import into tax software: Many crypto tax platforms like Koinly and CoinLedger can import your XPUB key. This import enables the software to retrieve your transaction history, facilitating accurate tax calculations automatically.
- Ensure compatibility: Some wallets use different formats like YPUB or ZPUB. If your tax software requires a specific format, you may need to convert your key using tools like the Bitcoin Extended Public Key Converter.
While XPUB keys don't grant spending access, they reveal all transaction histories and addresses. To protect your financial privacy, share them only with trusted platforms.
How to avoid capital gains tax on crypto
Minimizing or avoiding capital gains tax on cryptocurrency requires strategic planning. We're not tax experts, but here are several methods to consider:
- Hold investments long-term: Retaining your cryptocurrency for over a year may qualify you for long-term capital gains tax rates, typically lower than short-term rates.
- Use tax-loss harvesting: Selling some assets at a loss can offset gains from other investments, reducing your overall taxable income. This strategy is particularly effective.
- Leverage capital gains tax allowances: Some jurisdictions offer annual tax-free allowances for capital gains. By strategically timing your asset sales, you can maximize these exemptions.
- Give a cryptocurrency donation: Cryptocurrency donations are a great way to support meaningful causes and offer unique tax benefits. When donating crypto, you won't be taxed on its disposal, and you can also qualify for a tax deduction, potentially lowering your tax bill.
- Take out a cryptocurrency loan: Consider taking out a loan using your crypto as collateral. This non-taxable event allows you to access fiat currency without incurring a tax burden.
We suggest talking to a tax professional about how these strategies may affect you based on your specific situation and local tax laws.
Future trends in capital gains tax on crypto
Cryptocurrency taxation will evolve quickly due to recent political shifts, potential changes in rules, and the growing adoption fueled by institutions and nations. Here’s what we expect:
More government oversight
As cryptocurrency trends toward mainstream legalization, the IRS will likely increase its monitoring and enforcement of tax rules. This means:
More reporting requirements for registered exchanges and DeFi platforms.
Stricter Know Your Customer (KYC) and Anti-Money Laundering (AML) rules to stop tax evasion.
Greater cooperation among global tax authorities to better track transactions across borders.
Standardized tax rules
If the Trump administration fully commits to supporting cryptocurrency, there will be a push for similar tax policies worldwide. We could see unified guidelines for taxing cryptocurrency in different countries, facilitating compliance for businesses and individuals using crypto across borders. There would also be clearer rules about taxing capital gains, staking rewards, and other crypto activities.
New tariffs for NFTs, DeFi, and other uses
Governments may clarify how to tax NFT sales, royalties, and transfers, possibly treating them like collectibles or business income.
Conclusion
If policymakers take a friendly approach to crypto, such as changes in the SEC’s regulations, this could lead to tax benefits for blockchain innovation and crypto use. You can expect favorable tax rules for long-term investors to encourage holding rather than quick trading.
Information for this article was taken from these official or expert sources:
- Internal Revenue Service (IRS) – U.S.: Guidance on the tax treatment of virtual currencies.
- Her Majesty's Revenue and Customs (HMRC) – U.K.: Policy paper on cryptoassets for individuals.
- Canada Revenue Agency (CRA): Information on the taxation of cryptocurrencies.
- Australian Taxation Office (ATO): Guidance on cryptocurrency and tax obligations.
- Inland Revenue Authority of Singapore (IRAS): E-Tax guide on digital payment tokens.
- New Zealand Inland Revenue Department (IRD): Guidance on cryptoassets and taxes.
- South African Revenue Service (SARS): Tax treatment of cryptocurrencies.
- Japan National Tax Agency (NTA): FAQs on virtual currencies.
- German Federal Ministry of Finance (BMF): Taxation of cryptocurrencies.
- French Tax Administration (DGFiP): Tax guidelines for digital assets.
- Swedish Tax Agency (Skatteverket): Information on virtual currencies and taxes.
- Swiss Federal Tax Administration (ESTV): Guidance on the taxation of cryptocurrencies.
- Netherlands Tax and Customs Administration (Belastingdienst): Information on cryptocurrencies and taxes.
- Italian Revenue Agency (Agenzia delle Entrate): Clarifications on the tax treatment of cryptocurrencies.
- Spain Tax Agency (Agencia Tributaria): Taxation of virtual currencies.
- Norwegian Tax Administration (Skatteetaten): Cryptocurrency tax guidance.
- Danish Tax Agency (Skattestyrelsen): Taxation of virtual currencies.
- Indian Income Tax Department: Clarifications on cryptocurrency taxation.
- Brazilian Federal Revenue (Receita Federal): Tax obligations related to cryptocurrencies.
Please consult a local tax consultant, as tax regulations are bound to change