As a result of the widespread use of cryptocurrency, crypto day trading is one of the most lucrative ventures in the world. It is a wonder, then, how it’s still a little-known fact that cryptocurrencies get taxed in most countries. This is because most cryptocurrency holdings are considered “property” or assets like gold and are taxed accordingly.
Simply buying cryptocurrency and holding crypto by itself doesn’t incur tax. However, when crypto is used as a form of exchange, it is considered a taxable action. An exchange can be selling the crypto for real money, trading it for another type of cryptocurrency, or paying for goods and services with digital currency.
It is recommended that active traders of cryptocurrencies keep an accurate record of their transactions to track how much tax is expected from their earnings so as not to run afoul of the law.
Fortunately, not all countries require a tax for the trade of cryptocurrency. Cyprus is well known for this and is popularly lauded as a crypto tax haven because of its lenient laws regarding the trade of digital currencies. But, before we go into why Cyprus is a tax haven, it is essential to understand how crypto tax works.
How does the crypto tax work?
Over the last couple of years, cryptocurrency has grown by leaps and bounds and has the potential to grow even more. It is very likely because of this growth that most governments consider it an asset or a holding like stocks and bonds.
So, how is crypto taxed?
As stated earlier, buying and holding cryptocurrencies is not a taxable event. However, once crypto is traded for cash, a product or service—anything that provides a profit or gain—you will have to pay a certain amount in tax for that profit.
Like stocks and bonds, the income generated from the crypto trade is taxed differently depending on how you got the digital currency and how long you have held it. You pay short-term tax gains if you have owned the crypto for less than a year before trading it. In the same way, if you have owned the crypto for a more extended period, you’ll have to pay long-term gain taxes.
How do you know if you owe crypto taxes?
If your crypto had increased in value from when you first bought it and sold it or otherwise traded it for profit, then you would have performed a taxable action with it and, as such, owe tax from the profit.
If the value of your crypto increases while you own it and you profit from selling your cryptocurrency for fiat currency, or use your crypto to buy a product or service of some kind, and trade your digital currency for another type, you have to pay a tax on it. To know exactly how much you owe in crypto taxes, you have to determine how much you initially bought the currency for and then compare that price to the sale price from when you used the crypto.
The difference is your profit, and you pay a tax for that gain. Though it can be easy to track the gains when you sell crypto or use it to buy a product, it can be a hassle regarding crypto trades. Crypto tax software is designed to keep track of your crypto gains and calculate the tax you’re expected to pay, and they are a great help.
Is Cyprus a crypto tax haven?
Not every country has implemented a tax on crypto trades. As an example of this, Cyprus is popularly lauded as a tax haven for crypto traders because, until recently, no legal framework has been put in place for digital currencies, nor is there any guidance on how the currencies should be recognized or handled.
However, this is not to say that Cyprus is tax-free for crypto. It is just that, until recently, Cyprus tax laws were more lenient for crypto trading. For example, profits from trading cryptocurrencies are not taxed. VAT is also exempted from this. However, the country still enforces a corporate income tax of 12.5 per cent, making it one of the lowest rates in the EU.
Although Cyprus is popularly seen as a crypto tax haven, it is not the only crypto-friendly nation globally. Many countries have high crypto adoption rates, while the debate on crypto regulation is ongoing and the fine-tuned legislation is yet to be imposed. In many cases, crypto tax is usually lenient where crypto regulation is established.
For example, Switzerland is one of the few countries that does not enforce capital gains taxes on the sale and trade of cryptocurrencies. Both Ethereum and Shapeshift are well incorporated in the nation. Malaysia and Portugal do not impose any capital gains tax or VAT on the sale or trade of cryptocurrencies, so it is an excellent place for crypto investors. In Singapore, it is almost the same, but if a company’s primary business is the trade of digital currencies, then it is liable for an income tax. Also, Greece imposes a 15 per cent tax on capital gains from crypto transactions, which can be mostly seen as a low tax compared to other countries.
The massive growth of cryptocurrencies in recent times has forced most countries to make provisions for their potential and implement policies to keep its spread in check. Taxation of crypto transactions is just one of these steps and will almost definitely not be the last. It is essential, then, for active crypto traders to keep abreast of new laws that might affect them so as not to run afoul of the law.