The process of accounting for bitcoin taxation can be pretty overwhelming if you’re unprepared. There are many things to consider such as the number of trades, fiat exchange rates at certain times, and the transactions from multiple wallets both in and outside exchanges.
In this article, we discuss different approaches towards taxation on cryptocurrency and how to best manage your crypto funds.
Disclaimer: This guide has basic information on bitcoin and taxation, it is not meant as a tax guide or offering of any legal advice. We, (Bitwala) do not offer tax advice and highly recommend that you consult a taxation expert or accountant for guidance on how to file your own crypto taxes. Bitwala is not liable for any damages or losses incurred by following any information given in this article.
Crypto taxation differs from country-to-country and as a result, we focus primarily on unfolding bitcoin taxation frameworks in the EU. Since early 2018, wallet providers and exchanges in the EU are required to practice due diligence of their KYC processes for their customers.
In many countries, such as the U.S. and the EU Member States, cryptocurrencies are subject to taxation. While exchanging cryptocurrencies, traders experience a capital gain or loss. Those gains and losses are taxable - even if they’re in the form of a cryptocurrency!
Crypto taxes in Europe
The EU defines “virtual currencies” (including cryptocurrency) as “a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically”.
In 2015, the Court of Justice of the European Union 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.
Today, the approach to bitcoin taxation differ on a European level. Switzerland, for example, follows a more “crypto-friendly” approach.
Furthermore, both the buying and selling of bitcoin and the use of bitcoin as a means of payment can be viewed as “sales”. These “sales” are considered as “speculative transactions” under German income tax.
HODL - "the easy way to do your taxes"
In some countries, hodling 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 whereby trading those assets in less than one year leads to income tax. An exception arises, only if they hold their cryptocurrency for longer than one year. In that case, any profit (or loss) is not taxable. Patience may reward you with no capital gains taxation.
Pro Tip: 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.
Some wallet providers facilitate the easy retrieval of information on your transactions by offering the possibility to download a CSV file and export your data. What’s great about Bitwala is that you can easily track all your bitcoin purchases and export your exchange data.
What crypto tax tools are out there?
Tools offered by Cryptotax and Cointracking support the tracking and calculation of the right taxes. These services even present the possibility to directly import individual trading history from various exchanges, mining income, as well as calculating capital gains.
It is still important to remember that you should hire a good accountant or tax lawyer if you are experiencing concerns about how to file reports on your crypto transactions or if you think that you may be liable to pay back sums of tax from your gains.
For more details on taxes on mining and VAT for cryptocurrencies, check out our academy article; “Taxes: A Guide To Getting Started”.