Today I want to talk about Cryptocurrency taxes . What transactions are considered as taxable events and what are not.
Cryptocurrency investing is not like investing in the stock market. Crypto is usually considered as property. So these actions can be considered as taxable events
Selling Cryptocurrency for Fiat money
If you have any crypto currency for example Bitcoin,Ethereum, Cardano, doesnt matter which one you have and you sell it for Fiat money like Dollars or Euros this action is a taxable event. So you will have to pay taxes on your capital gain on it. ( Will discuss the German 1 year hold at the end)
For example you bought 1 BTC for 20K Euros in December 2020 and you sold it for 40K Euros in February 2021. You now have a gain of 20k Euros , so you will have to pay tax on the 20k Euros capital gain and not on the whole 40K Euros. The taxable amount varies but in Germany the tax will be based on your Tax Class.
Trading Crypto for Crypto
A large majority of people think that trading cryptocurrency for other cryptocurrency is not taxable, well that is not true if there is a gain it is considered as a taxable event. For example you have 1 BTC and you convert 0.5 BTC into Ethereum when ethereum was down. Then bought 0.5 BTC back when BTC was down. You might think that at the end you still have BTC and nothing changed. Well now you have done 2 transactions while converting your Crypto. The first one was Converting BTC to ETH and the second one while converting ETH to BTC. Both of these transactions will be taxable events
Staking is a process that allows rewards to be earned by holders of a specific coin.
Staking derives from the PoS (Proof-of-stake) mechanism, used by a distributed blockchain network, where blockchain miners can mine or validate block transactions according to how many coins they have. The more coins they hold, the more mining power they have. Staking rewards are shared with users who own the cryptoassets (like eToro and our clients) and who delegate their voting rights to staking pools. The more validations that are delegated to a staking pool, the higher chance of being elected to produce the next block, and the more rewards likely to be received.
The income that the taxpayer receives from Proof of Stake-based cryptocurrencies can be recorded as income from services.
Buying something with Crypto
Yup if you buy something using cryptocurrency you are performing a taxable transaction. Even buying a cup of coffee or a burger means that you have converted your crypto currency even if the vendor is accepting cryptocurrency as a mode of payment.
Holding or HODL
Whats not taxable is holding or Hodling. If you buy cryptocurrency and do absolutely nothing with it. Its not taxable. Obviously you can move to different exchanges or wallets but as long as you keep holding it there are not taxes on it. Even if there are unrealized gains. For example you bought 1 BTC for 18k Euros in December 2020 and that 1 BTC is at 45K Euros today if you dont sell it , convert it or buy anything with it and just keep holding it. There will be no tax on it.
In Germany if you hold your cryptocurrency for more than a year, if becomes tax exempted so if you sell your crypto after holding it for one year there will be no taxes on it.
So as in our example if you bought 1 BTC for 18k on 1st December 2020 you can sell it tax free on 2nd December 2021.
Even though you might be thinking that the Government might not know that you are doing these taxable transactions, which might even be true at the moment. The financial institutions are working tirelessly to get that tax money so they might not be able to track your crypto today but be sure that they will be able to in the future so instead of getting a big fine in the future its always recommended to pay your taxes and avoid a big headache in the future!
*None of this is meant to be considered as investment, legal or tax advice . As I am not a financial expert nor a tax consultant please do your own reasearch and come to your own conclusions I am only sharing my experience with stock investing. The video and articles are accurate as of the posting date but may not be accurate in the future.