Deepika- Crypto taxes are part of the most complicated taxation systems, characterized by a wide variety of mechanisms for identifying taxable entities.
- Switzerland and the UAE are among the tax-haven countries that are generally favorable for saving taxes on crypto assets.
- Some countries levy heavy taxes on digital assets in a bid to deter the general adoption of crypto. These include India, Estonia, etc.
Most nations have come up with their own set norms and reasons to put taxes on crypto assets. It is mostly done in 2 components — income tax and capital gains tax. Countries that impose heavy taxes include India, Estonia, Japan, etc., while those who are more accepting of crypto and are tax-savvy are Switzerland, UAE, and Germany.
Crypto taxation can get very complicated and highly debatable, given the lack of physical existence of the assets. It is further complicated by the fact that it is a cross-border exchange with no fiat existence in almost all jurisdictions and is mostly an investment instrument.
How does crypto taxation work
Crypto taxation consists of two main components — a tax on income and a tax on capital gains.
- Income for crypto tax: Salaries in crypto are defined as earnings via mining, staking, lending, airdrops, and any other crypto-denominated salary given out by dApp organizations to their employees. Tax can be applied by the market price of the token on the day it was received or withdrawn. Some jurisdictions can also allow the subtraction of power costs incurred such as in mining.
- Capital Gains for crypto tax: Capital gains in crypto are the profits from cryptocurrency sales and NFT sales into fiat money. However, the calculation of capital gains involves complexity due to the variability of token prices that can be taxed. Apart from the difference in transaction date and liquidity withdrawal date, multiple transactions to be filed annually yield different outcomes due to everyday price fluctuations.
Some countries let individuals choose the method by which they file their taxes, given it stays the same for every transaction.
- Taxability of crypto-to-crypto trade: Some countries like Italy, France, Austria, Poland, Croatia, and the UAE do not tax exchanges that occur between two cryptocurrencies, as long as the assets have no physical existence. However, countries like the US, Australia, and the UK consider swapping BTC for ETH as a taxable event.
- Long-term and short-term capital gains: Some countries levy different taxes for holding capital gains for a set period of time instead of instantly liquidating them. For example, the US charges less tax on capital gains withdrawn over 365 days.
- Deduction of losses: Capital gains should typically equate to the net profit made which means gross profit minus loss incurred. However, some countries, like India and Estonia, do not allow for the deduction of losses from the taxable amount. Most countries, though, put a tax on the net profit made. Some countries put a negligible tax on every transaction, including the losses, for the purpose of tracking each of them. For example, Indonesia imposes a 0.11%-0.22% tax on all crypto transactions while India imposes a 1% TDS (Tax Deduction at Source).
- Professional trading: Some jurisdictions may impose heavier taxes on professional traders, as compared to casual investors. It is up to the governments and the tax authorities, whichever criteria they factor in such as the number of transactions, size of transactions, frequency, etc.
- Tax loss harvesting regulations: For jurisdictions that allow for loss deductions in capital gain calculations, individuals can take advantage of declining market prices. By selling assets at a loss, individuals can reduce the tax to be paid. This strategy, known as tax loss harvesting, involves selling assets at a loss near the end of the tax year and rebuying them at a lower price. It is important to note that regulations regarding tax loss harvesting vary among countries, and there is ongoing debate regarding the use of non-fungible tokens (NFTs) for this purpose.
Some countries impose restrictions on these practices while others are more lenient. Interestingly, utilizing NFTs for tax loss harvesting is another issue of debate as they are non-fungible. A Bitcoin sold on a day can’t be differentiated from another bought on the next day, but that’s not the case with NFTs.
- Wealth Tax: Some countries even imply a wealth tax on crypto assets owned by an individual, apart from capital gains and income tax. It is based on your portfolio and its value on a specific date. Some countries may put a threshold, which means that the wealth tax is applicable above the value of possessions.
Best and worst jurisdictions for crypto taxation
Countries like Bahrain, Barbados, the Bahamas, the Cayman Islands, Singapore, Switzerland, and the UAE are considered classic tax havens and provide favorable terms for crypto assets, including the absence of capital gains tax.
Puerto Rico, a Caribbean Island owned by the USA but not under its jurisdiction, is the most popular tax haven for Americans. They can reside in Puerto Rico while retaining their American citizenship and take advantage of Puerto Rico’s relaxed taxation.
Switzerland charges only 0-13% on income tax and 0.1% wealth tax, only above a very high threshold.
In Singapore, some overseas investment taxes may be applicable but are very very low.
The Cayman Islands charges import duties of 22-26%, and cryptocurrency is considered as such.
Germany, Malta, Belarus, Portugal, Bermuda, Croatia, Slovenia, Lichtenstein, Malaysia, Central African Republic, El Salvadore: These countries are not typical tax havens. But they have made provisions for crypto assets to be relieved from heavy taxation, establishing themselves as pro-crypto jurisdictions.
El Salvadore and the Central African Republic recognize Bitcoin as a legal tender. While the Central African Republic gives substantial concessions to overseas Bitcoin investors, El Salvadore has made Bitcoin completely exempt from taxes. Belarus makes cryptocurrencies completely exempt from taxes. Malta imposes no wealth tax and zero tax on long-term capital gains. Other taxes are generally low. Bermuda only levies a wealth tax for holding crypto over 3 years. Malaysia levies an income tax for professional traders only. Germany imposes zero capital gains taxes for holding assets over 365 days and zero income taxes for an income of 600 EUR and less.
Portugal charges no long-term capital gains taxes over 365 days and an income tax of 15%. But for mining, it levies a whopping 95% tax. Hence, Portugal is an otherwise crypto-friendly country, but a no-mining zone.
Croatia makes crypto-to-crypto trades non-taxable. When held for over 24 months and then converted into fiat, becomes non-taxable as it charges no tax for long-term capital gains. Other taxes are as low as 10%.
Norway, Argentina, Italy, France, Austria, Poland, Hungary, Ireland, and Indonesia:
These countries fall somewhere between friendly to strict. They use the cost averaging method for capital gains calculation and impose little restrictions on tax loss harvesting. Norway imposes a wealth tax of 0.85% on assets worth US$160,000. Argentina charges a wealth tax of 3.5% above worth of approx. US$150,000. Ireland completely bans tax loss harvesting by a period of 30 days of rebuying within the tax filing date. Indonesia imposes a 0.11-0.22% tax on all crypto transactions to keep track of them.
USA, UK
These two developed worlds are critical of crypto, advocating for some sound regulations. Investors generally consider them heavy tax-charging nations when it comes to crypto. Both of them tax crypto-to-crypto trade and let the investors choose among FIFO, LIFO, and average costing methods for capital gains tax. In the US, long-term capital gains get taxed almost half as much as short-term gains, over 365 days. It also charges additional tax for professional traders. Tax loss harvesting is banned for securities but no such regulation on crypto. The UK has completely banned crypto tax loss harvesting for 30 days of rebuying within the tax filing date.
Canada, Australia
They have similar taxation laws as the US and the UK but are a bit more strict in some aspects. They both tax crypto-to-crypto trade and charge wealth tax. Australia goes a step beyond and imposes a tax on “wrapping” ETH into WETH. It lets the investors choose among FIFO, LIFO, and average costing methods for capital gains tax. Canada imposes taxes half the rate of income tax on all capital gains regardless of short-term or long-term. It also imposes cost-averaging methods to calculate capital gains.
Spain, Denmark, Netherlands, Belgium, and Iceland: These countries are more on the stringent side of crypto regulations and taxation. In Belgium, capital gains can be taxed up to 33%, while professional traders can be taxed as high as 50%. In Spain, only 25% of the capital losses are allowed to be deducted for taxation on capital gains. Income tax can go as high as 47% and a wealth tax may be imposed on a net worth above 700,000 EUR.
Denmark allows only 30% of the losses to be deducted from capital gains. Apart from that, all capital gains are taxed as income tax only which could go as high as 45%.
The Netherlands charges tax on crypto-to-crypto trade. It also imposes a 32% tax on capital gains and doesn’t allow the deduction of the losses.
Japan, Israel, Philippines, South Africa, India, and Estonia: These jurisdictions are known for their stringent regulations and high taxes on cryptocurrencies.
However, it is important to note that the cost of living in some of the tax-friendly countries is inexorably high. Decisions regarding tax-based residency should take into account the significantly high cost of living in some tax-friendly countries.
