From theblock by Brian McGleenon

With cryptocurrencies gaining mainstream traction, understanding the tax implications of owning, trading and earning digital assets has become crucial for investors worldwide. The regulatory landscape is complex and evolving, with regions like the United States, United Kingdom and European Union each applying distinct tax rules, rates and exemptions.

Increased scrutiny from tax authorities like the Internal Revenue Service and HMRC, along with new frameworks like MiCA in the EU, means investors must stay proactive and informed. "Many individuals who have dabbled in crypto were not initially aware that they would need to account for tax reporting and holdings. However, as tax regimes plan to increase their scrutiny starting in 2025, it’s crucial to be proactive," Paybis CEO Konstantin Vasilenko advised.

Taxable and non-taxable events in the U.S.

In the U.S., cryptocurrency is classified as a digital asset, and the Internal Revenue Service treats it similarly to stocks, bonds and other capital assets. Profits from crypto are taxed at varying rates depending on whether they are considered capital gains or income, which in turn depends on how the crypto was acquired and how long it was held.

Understanding your crypto tax obligations in the U.S. depends on how you’ve used your digital assets, as various activities fall under either taxable or non-taxable events. Effective tax planning is key, with strategies like tax-loss harvesting — using losses to offset gains — or holding crypto within Individual Retirement Accounts (IRAs) to benefit from tax-deferred growth. However, as exchanges are now required to report customer holdings, the IRS is intensifying its focus on compliance, making transparency more important than ever.

Buying cryptocurrency with cash and simply holding it does not trigger a tax. You only incur taxes when you sell the crypto, and the gains become "realized." Donating crypto to a qualified charity may qualify you for a charitable deduction. Similarly, receiving crypto as a gift is generally non-taxable until you sell or use it in a taxable activity like staking.

Selling crypto for cash incurs capital gains tax in the U.S. if you sell the asset for more than you paid. Losses, however, may be deductible. Converting one cryptocurrency to another, such as exchanging bitcoin for ether, is considered a taxable event since it involves selling one asset to purchase another. Similarly, using crypto to buy goods or services requires you to pay capital gains tax, as the IRS views this transaction as a sale.

Income-related crypto activities also come with tax responsibilities. If you’re paid in cryptocurrency by an employer, it is treated as taxable income according to your income tax bracket. Similarly, receiving crypto in exchange for goods or services must be reported as income. Mining crypto generates taxable income based on the fair market value of the coins when received, and if mining is part of a business, it is subject to self-employment taxes. Staking rewards are taxed similarly, with liabilities calculated based on the value of the rewards when received.

HMRC’s comprehensive framework in the UK

In the UK, the HM Revenue and Customs (HMRC) classifies cryptocurrencies as assets. This distinction means any gains or losses from crypto transactions are subject to capital gains tax.

Capital Gains Tax (CGT) applies to any disposal of cryptocurrency, which includes not only selling but also using crypto to purchase goods, exchanging one cryptocurrency for another, or gifting digital assets. The tax rates can be significant, especially for higher earners, reaching up to 24%. For basic-rate taxpayers, gains above the exemption threshold are taxed at 10%. Both basic-rate and higher-rate taxpayers now benefit from an exemption on the first £3,000 of gains. However, if these gains push a taxpayer into the higher-rate band, they will be subject to elevated CGT rates.

In addition to capital gains, certain crypto activities fall under income tax. Profits from mining and crypto received as employment compensation are taxed as income. Employers paying in crypto must account for National Insurance Contributions (NICs), both for themselves and their employees. Subsequent gains on crypto received as remuneration, however, are generally subject to CGT.

Evolving tax policies within the EU

The European Union presents a diverse and complex crypto tax landscape, as each member state sets its own policies. This fragmentation means tax obligations can vary dramatically from one country to another.

"The European Union has a fragmented approach to cryptocurrency taxation, as tax policies are governed by each individual member state rather than a unified framework. In this sense, it is important to highlight that most European countries classify cryptocurrency as property, taxing gains from sale, exchange, payment, etc. However, the specifics of these taxes vary significantly across countries," Brickken General Counsel Elisenda Fabrega said. 

In Germany, cryptocurrencies are considered private money, and gains are tax-free if held for over a year, encouraging long-term investment. However, selling within a year incurs income tax rates that could go up to 45%, plus a 5.5% solidarity surcharge for incomes above €10,908.

Conversely, Spain taxes crypto gains as ordinary income, with rates ranging from 19% to 28%, regardless of the holding period. Strict reporting standards also apply to crypto trading and holdings. Portugal, once known for its lenient crypto tax policies, has tightened regulations. Current rates range from 14.5% to 53%, with a standard 28% capital gains tax and specific provisions for mining activities.

The EU's MiCA regulatory framework

The EU is working toward harmonization, notably with the Markets in Crypto-Assets (MiCA) Regulation. This framework aims to establish consistent standards for crypto-asset issuers and service providers, protecting investors and enhancing market stability. Furthermore, the EU has adopted a tax transparency directive, compelling crypto-asset service providers to report transactions involving EU residents. According to Fabrega, “Despite these efforts, the core aspects of cryptocurrency taxation—such as tax rates, thresholds, and exemptions—remain under the control of the member states.”

For now, EU residents must navigate a patchwork of regulations. Countries like Slovakia, Malta, and Luxembourg offer relatively low tax rates, attracting crypto businesses and investors. In contrast, nations like Denmark and Finland impose some of the highest taxes, treating crypto gains as personal income.

As Fabrega emphasizes, staying informed is crucial in this evolving environment. “The EU's efforts to harmonize aspects of the web3 environment show promise, but until a unified framework is established, understanding local laws is key to managing tax obligations.”

Looking ahead, the MiCA regulation and the EU's travel rule will come into force in 2025, focusing on anti-money laundering (AML) and combating financial crime. As Konstantin Vasilenko notes, these measures will also intensify tax oversight, bringing more crypto activities under scrutiny by local authorities."