Cryptocurrency taxation: What's important for investors to know

29, Oct - BLOG

The cryptocurrency market, new and rapidly evolving, offers private investors unique opportunities for portfolio diversification. However, with capital growth comes tax liabilities that cannot be ignored. After several years of uncertainty and trial-and-error approaches, tax authorities have started to regulate the taxation of cryptocurrencies more clearly, and now every investor should understand the basic rules for accurate and timely filing.

In this article, we will break down the main aspects of cryptocurrency taxation to help you prepare your return yourself. When we talk about taxes on cryptocurrencies, we mean ‘digital assets’ - a term that includes both classic cryptocurrencies (e.g. bitcoin and etherium) and stablecoins linked to the exchange rate of fiat currencies.

Basics of cryptocurrency taxation 

The taxation of cryptocurrencies has been evolving since tax authorities turned their attention to the cryptocurrency market. In the beginning, it was only an administrative doctrine, not necessarily applicable to taxpayers and they could challenge it. Back then, taxation was confiscatory, going up to 60% of capital gains. Later, a new tax regime was introduced, applicable to the vast majority of ‘non-professional’ investors.

For ‘professional’ investors, a tax regime similar to income tax still applies, including miners. This system for pros and miners only affects a small number of people and can be left out of the general topic. However, for those who wonder whether their activity is not a professional trade, the approach of the tax authorities to this issue is important. Below we will look at this aspect in more detail.

Taxation of cryptocurrencies: what is important to know for tax calculation and filing?

The 30% flat tax on capital gains or flat tax (lump sum withholding tax on capital gains) applies to all income from cryptocurrencies and amounts to 30%. Of this, 12.8% is the tax itself and 17.2% is social contributions. There is an option to choose a progressive tax scale if it suits, for example, low-income families (0% or 11% scale). If you choose the progressive tax scale, it will be applied to all investments for the year, but social contributions (17.2%) will remain compulsory.

There are also transactions that are taxable, let's take a look at them:

• Exchange of digital assets for fiat currency, for example, when converting cryptocurrency into euros;
• Payment for goods or services with digital assets.

Once assets are withdrawn from the cryptocurrency space, the transaction is taxable and must be declared. For example, the use of a cryptocurrency bank card requires the recording of such transactions.

In addition to transactions that are taxable, there are those that are not taxable, such as:

• Exchanges between cryptocurrencies (e.g., exchanging bitcoins for dogecoin);
• Holding cryptocurrencies in a portfolio without transactions.

Tax calculation and help with filing a cryptocurrency return

For transactions with multiple transfers, a complex calculation method is used that takes into account the change in value of the cryptocurrency in the portfolio. The formula looks like this: transfer price - (purchase price x [transfer price/total portfolio value]). In this case, the transfer price is the amount received upon sale, and the total portfolio value is its estimated value at the time the assets were purchased, allowing you to determine capital gains.

Some cryptocurrency platforms, such as Binance, offer tools to simplify the tax return process. Users can get a report of all transactions for the tax year, which helps in accurate tax calculation. Such platforms allow automatic export of data and avoid errors while filing tax returns.

Exemptions and additional aspects of cryptocurrency taxation

An exchange between digital assets, i.e. between two cryptocurrencies, is not taxable for individuals. For example, if you exchange bitcoin for Ethereum (ETH), this transaction is not taxable even if there was a capital gain from the exchange. Long-term holding of cryptocurrencies on an exchange platform or in a personal portfolio is also tax-free. In addition, if your total sales for the tax year do not exceed a certain minimum threshold, capital gains tax may not apply.

Cryptocurrency staking is used to secure the blockchain network, which operates on Proof-of-Stake (PoS) consensus. In return, users are rewarded in cryptocurrencies, which can be treated for tax purposes as income from cryptocurrency mining. When lending cryptocurrencies, you also earn interest, which can be taxed at the capital gains rate.

Cryptocurrency mining is taxed under the non-commercial profit regime (BNC). The value of the cryptocurrencies mined is valued at their fiat value at the time of receipt. The taxation of NFTs remains uncertain, and interpretations vary - some consider them digital assets, others classify them as works of art.

Conclusions: What is important for an investor to know?

Don't forget that if you use foreign cryptocurrency platforms, such accounts need to be declared, otherwise fines may be possible. As with other foreign accounts, cryptocurrency assets on foreign platforms are subject to record keeping. If you thought that investing in cryptocurrencies could avoid taxation, it is important to remember that the tax authorities are increasingly employing specialists to monitor transactions involving digital assets.