Taxes and Crypto Exchanges: Navigating the Complexities

Crypto Taxes in the World

With the exception of El Salvador, where Bitcoin is the official means of payment, cryptocurrencies in the world are considered a taxable asset or taxable property. Legal entities fall under taxation standards: when an owner launches a platform with, say, Merkeleon digital crypto exchange software, the business is taxed. In many jurisdictions, a private entity is also subject to taxation: when a trader transacts crypto, they need to pay taxes. Now in detail about crypto taxes in the world.

Crypto Taxes on Centralized Exchanges

There is no single definition of cryptocurrency. Thus, countries cannot elaborate a common tax policy. Another contributing factor is the anonymity of virtual currencies that bypass traditional financial institutions. Moreover, the crypto industry is a relatively new phenomenon, evolving and transforming every day. To set tax regulations for virtual money, countries define it, interpret user’s actions and draft norms.

Crypto taxes on centralized exchanges:

• Income tax,
• Capital gain tax,
• Mixed tax.

Income Tax

Profit from cryptocurrencies may be considered additional income that should come within income tax. Income tax is used for cryptocurrencies in the EU, Latin American and Asian countries: Argentina, Canada, Belgium, Czech Republic, Denmark, Germany, Hungary, Russia, Japan, Malaysia, the Philippines, etc.

Crypto activities that qualify for income tax:

• Staking reward;
• Mining reward;
• Receiving a crypto payment in exchange for a service;
• Receiving airdrops, coins and tokens as a result of hard forks;
• Interacting with investment DeFi platforms.

For instance, Jack receives extra income from virtual assets. He needs to calculate their market value in the local fiat currency on the day these assets are received. Then, Jack pays income tax on the received amount. If Jack gets rid of these crypto assets, he also needs to pay capital gain tax on the received income.

Capital Gain Tax

Within this approach, profit from virtual assets is deemed as capital gain. Cryptocurrencies are usually acquired for purposes similar to stocks, shares, bonds and other forms of personal property: ownership or trading. Thus, their value can advance or depreciate. When an investor liquidates an asset, they receive a capital gain or loss. If the price of a stored virtual asset surges, this asset is taxable as capital gains.

Ways to liquidate crypto assets:

• Sell cryptocurrencies for fiat;
• Exchange one crypto asset for another: stablecoins, tokens, NFT;
• Purchase a product in cryptocurrency;
• Pay for services in cryptocurrency;
• Give cryptocurrency as a gift (requires clarification in different countries)

Often, a capital gains tax has more favorable terms than an income tax. Sometimes, these activities can be exempted from taxes. Capital losses can compensate for taxes too, reducing their amount.

Countries with capital gains tax: Australia, New Zealand, Brazil, the USA, Bulgaria, Croatia, Latvia, Estonia, Finland, France, Israel.

 Mixed Tax

A taxation system in some countries does not meet the above classifications. There are 2 reasons:

• Uncertain position of cryptocurrencies;
• Mixed or contradictory approach to crypto.

Singapore

If Jack trades virtual currencies, he pays taxes on the profit. In case the profit is a long-term investment, Jack does not pay taxes.

Revenue from cryptocurrencies is considered a capital gain when traded as an investment. However, being a non-property capital gain, crypto is not taxed.

Sweden

As a private entity, Jack pays capital gain taxes for selling or exchanging crypto for earning. If Jack holds virtual assets as shares, the profit is income from business operations. Mining can be taxed as employment or business income.

United Kingdom

The UK applies both income and capital gains taxes. Jack gets a salary in a cryptocurrency and pays a personal income tax. If he uses virtual currencies for trading, he pays a capital gain tax.

Austria

In the Austrian list of activities subject to income tax, cryptocurrencies are classified as other business assets. Companies engaged in trading pay a corporate income tax of 25%. If the profit is distributed, the total tax rate together with capital gains is 40%.

Greece

Cryptocurrencies can be taxed as a capital gain and income. Companies that revenue from mining or trading pay a fixed tax of 29%. For individuals a capital gain tax is 15%, while an income tax rates from 20% to 40%.

Crypto Taxes on Decentralized Exchanges

Many authorities have not yet issued a comprehensive guide on taxation in the field of decentralized finance. For now, users should stick to the existing norms of determining tax liabilities in the DeFi domain.

Often, authorities perceive buying, selling and trading on decentralized exchanges just like similar transactions on centralized platforms. Tax standards for staking, liquidity mining and farming, on the other hand, rely on the protocol.

It also matters what kind of activity a client performs. When they get rid of crypto assets, traders are usually free from taxes. Staking is charged. The boundary between the two is vague. So, users should review the country’s framework in advance.

Tax-Free Crypto Operations

Some cryptocurrency transactions do not require clients to pay taxes. These activities are universal for countries that have legal frameworks for the sphere of virtual assets.

Tax-exempt crypto activities:

• Buying cryptocurrencies for fiat;
• Transferring cryptocurrencies between the wallets of one user;
• Keeping cryptocurrencies long-term, or hodling (except for jurisdictions with a wealth tax);
• Gifting cryptocurrencies to someone else (depends on the place of residence);
• Donating cryptocurrencies to a registered charity.

Bottomline

Though many states have drafted standards and set tax norms, there is a room for improvement. The domain of digital finance is a young phenomenon whose regulations are being elaborated.

For instance, European countries have separate tax standards in every country. The EU is voting on a universal European document, MiCA, that will standardize the crypto industry. It means that existing frameworks will be eliminated in favor of a new, comprehensive document.

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