Taxes and cryptocurrencies
Nuri’s guide to cryptocurrency and tax. We break down what you need to know and what you need to do to declare your investments.
At Nuri, we believe everyone should have access to the knowledge they need to succeed. Our guide to taxing your Bitcoin spells out the A-Z of cryptocurrency tax.
Cryptocurrency & Tax
One of the key ideas behind Bitcoin is decentralization. This means that power is distributed across the network of users, instead of in centralized locations such as mainstream banks and governments.
Some cryptocurrency users think a tax on bitcoin is contradictory to its decentralised nature. Others find it hard to comprehend the concept of tax on bitcoin. These taxes can come in different forms. Taxes can be triggered through trading, exchanging, spending, mining, conversion, air drops, ICOs and receiving payments in crypto.
Cryptocurrency is still a young technology and this means that there is not yet a uniform approach to regulating it. As a result, we focus primarily on the unfolding bitcoin taxation frameworks in the European Union, Germany and the United States.
Crypto taxes in the European Union
Cryptocurrency in the EU is subject to taxation. When crypto holders exchange or sell crypto assets, they will experience a capital gain or loss. Gains and income can be taxable even if they’re in the form of a cryptocurrency.
In 2015, the Court of Justice of the European Union (CJEU) found that although bitcoin is not considered as legal tender, it can be viewed as a means of exchange and used as a method of payment. The EU VAT (Value-Added-Tax) Directive stipulates that the supply of goods and services by someone in an EU Member State is subject to VAT.
However, transactions involving bitcoin trading are exempt from VAT because of bitcoin’s use as a means of payment.
Crypto taxes in Germany
The German Federal Ministry of Finance expanded on the CJEU ruling that the exchange of Bitcoin (and other payment only tokens) into fiat is exempt from VAT. They also stated that receiving bitcoin as payment does not trigger VAT because in that case, bitcoin simply serves as an alternative to fiat money.
The buying, selling and use of bitcoin as a means of payment can also be viewed as “sales”. These “sales” are considered as “speculative transactions” under German income tax.
Nevertheless, Bitcoin miners still have to pay income tax and business tax on their gains from mining. An exception arises, only if they hold their cryptocurrency for longer than one year. In that case, any profit (or loss) is not taxable.
According to the Ministry, Bitcoin mining is also exempt from VAT. This is because it is not a traditional supply of services since there is no identifiable payment beneficiary. The tax exemption on mining is because the sum of transaction fees for a bitcoin payment is set voluntarily and cannot be directly linked to a specific mining service.
Crypto taxes in the United States
According to the U.S. Internal Revenue Service (IRS), cryptocurrency should be treated as property. Crypto is subject to the same level of tax reporting as any other property type like stocks and bonds.
The IRS classifies bitcoin as a “convertible” cryptocurrency because, while it can be traded online for other currencies, it can also be converted into fiat currency. In the U.S., the sale, exchange or use of bitcoin and other “convertible” cryptocurrencies to pay for goods and services are all regarded as taxable events.
The U.S. government takes tax seriously and its latest crackdown is guided by a focus on curbing tax evasion, online drug dealing, and other illegal activities.
Not only does the IRS require taxpayers to submit their crypto accounting for the last tax year, but their audits may also cover the previous three years. For some, that means quite a lot of accounting.
What if I don’t want to pay my taxes?
There are three little letters that you need to get acquainted with: KYC (Know your Customer)
KYC stands for Know Your Customer. KYC regulation requires exchanges and wallet providers to gather information about the identities of their users. This means that, if governments suspect investors are not paying their taxes, they can force exchanges and wallet platforms to provide user data.
At first, governments and law enforcement didn’t know what to do with cryptocurrency. But now they are developing blockchain analysis tools to catch tax evaders and make them pay their dues.
But there’s no need to have a cowboy attitude to paying taxes. With some basic organisation, it’s easier than ever to put your affairs in order.
What is the easiest way to manage my crypto taxes?
In some countries, holding your cryptocurrency for more than one year is regarded as the most effective way to manage excess taxes.
For individuals, the classification of those assets as speculative creates a situation in which trading those assets in less than one year leads to income tax. This can be avoided by holding assets for over a year. In that case, any profit (or loss) is not taxable.
The most important step to comply with tax regulations is to ensure that you keep records of all of your crypto transactions. We recommend that you keep track and trace your transactions to ensure compliance.
If all that sounds a bit confusing then we have some good news for you. Nuri is the first banking service to offer integrated crypto tax reporting solutions to users directly through our app. You can download an individualised, ready-to-use tax statement for all your Nuri transactions with a click of a button from your dashboard.
German and Swiss taxpayers will receive country-specific tax reports meeting all legal requirements. EEA residents can generate a generic tax report from the Nuri dashboard. Filing your tax statements on your cryptocurrencies trades will be as easy as attaching a PDF-file to an email.
4 Top Tips for Crypto Tax
1. Report taxes on your cryptocurrency investments
Financial authorities around the world know about cryptocurrency, they want to tax it and they’re willing to play the long game with people who try to avoid paying up.
2. Track all your crypto trading activities
A detailed track record makes tax reporting way easier when the time comes. Whether buying or selling from fiat or trading crypto to crypto, you need to know if you are tax-liable. Nuri’s integrated cryptocurrency tax reporting makes this easy and stress-free.
3. Consider filing tax even if you had losses
Cryptocurrencies fluctuate in price. Losses are often carried forward in most jurisdictions. It’s important to report all activity, especially with more complex portfolios.
4. Right handling of airdrops and hard forks
You might not even be aware of them, but airdrops and hard forks could be a taxable event in your country. For example, if you receive an airdrop and the amount is tied to the amount of assets you hold this may be seen as an incentive which needs to be reported as additional income. The best way to get on top of crypto taxes is to inform yourself about the rules and regulations in your jurisdiction, talk to an advisor or use specialized software to report on those events.
Looking for an easy and secure way to compile your Nuri crypto taxes? We’ve partnered with Crypto Tax Tool to offer you an easily exportable document of all your taxable assets. Head over to the Nuri web app to download yours today.