The cryptocurrency market continues to record incredible growth levels. Bitcoin alone already has over 1 million active and unique addresses, which indicate the volume of direct transfers being made across crypto exchanges.
This can surely get everyone excited to learn different cryptocurrency trading strategies, but unless you familiarize yourself with the taxes involved, it would be wise to proceed on the side of caution. The main thing to know is that income gained from cryptocurrency investments may be subject to cryptocurrency taxes.
In this simple guide, you’ll know the tax implications for when you sell, trade, or spend your cryptocurrency.
Taxes on Cryptocurrency Income for Goods or Services
In this scenario, there’s an exchange of goods or services using cryptocurrency. For example, if you’re an online publisher, you may be receiving income by selling books to customers who pay you with their digital assets.
Tax principle: Receiving payments for products or services in cryptocurrency is treated as ordinary income.
What it means: The transaction is considered a taxable event. In such case, the payment of income tax applies. In the United States, federal laws vary, but the range may be from 10% to 39.6%. Plus, you may owe the state in sales taxes. In the Philippines, aside from the transaction being subject to income tax, value-added tax (VAT) may also be charged for the exchange of goods or services.
Taxes on Cryptocurrency Mining
Mining in cryptocurrency pertains to the act of solving a mathematical puzzle that results in a block being added to the blockchain. By solving the puzzle, you get paid in digital coins. The payment you received then serves as a form of salary.
Tax principle: Any salary received is treated as ordinary income. In the cryptocurrency industry, the fair market value of a cryptocurrency may depend on the time that you received the coin.
What it means: Should you decide to sell the cryptocurrency that you mined, the value that you receive from the sale after deducting expenses also constitutes as taxable income. Since salary is equivalent to income, the same rule about paying income taxes based on both U.S. and Philippine laws applies. Note that under the Tax Reform for Acceleration and Inclusion (TRAIN) program of the Philippine government, you are exempted from paying personal income tax if your annual taxable income is below P250,000.
Taxes on Cryptocurrency Trading
Crypto trading pertains to buying and selling coins for profit, which is another way to engage in the cryptocurrency space without any mining involved. Whether you’re trading cryptocurrency for another cryptocurrency or fiat currency, both are considered taxable since it’s considered making an investment.
Tax principle: Selling or exchanging something can generate capital gains, which are subject to taxes under U.S. and Philippine laws.
What it means: In a scenario where trading or exchanging your token for another currency gives you capital gains, you may have to pay capital gains tax if you held your cryptocurrency for more than a year. In addition, you may be required to pay an extra 3.8% tax on net investment income.
However, if the exchange results in capital losses for you, such losses can offset your gains and reduce the tax you need to pay.
It’s worth noting that buying cryptocurrency using, say, U.S. dollars, is not going to subject you to taxes since the premise is that you won’t be realizing any gains until you trade, sell, or use your crypto assets.
Reporting Your Cryptocurrency Income
As a cryptocurrency trader or miner, you have the responsibility to maintain, organize, and report all of your income records. This doesn’t mean that you need to report every trade you’ve completed, but what you need to detail are the holdings, gains, and losses you were able to generate on your crypto transactions. If you get audited and your books aren’t right, you could get in trouble with government agencies.
In the United States, the Internal Revenue Service (IRS) has warned cryptocurrency holders who failed to report their income from buying or selling digital currencies from 2013 to 2015. Tax evasion cases are a serious matter for the IRS, which can distinguish if one’s failure to pay taxes is an honest mistake or a willful evasion of tax laws.
Meanwhile, the Bureau of the Internal Revenue (BIR) of the Philippines is the government agency that’s in charge of tax collection.
Today, some guidelines are already in place regarding taxation in the world of cryptocurrencies, and it’s your duty to know and abide by the rules and regulations. Although a number of countries don’t tax crypto income, including Germany, Singapore, Portugal, Malta, Malaysia, Belarus, and Switzerland, these so-called crypto havens may also have some exemptions for certain special cases. When there are grey areas involved, your best course of action is to do your due diligence.