Top 8 Crypto Tax Myths of 2023 Debunked
As crypto is rising in popularity, more and more countries are looking to impose taxes on crypto transactions. Recently, Portugal and Italy, previously considered tax-friendly countries, also introduced new crypto tax laws. Predictably, increasing regulations to the already complicated crypto landscape have resulted in many crypto tax myths.
Taxpayers are misinformed and confused about what is or isn’t taxable, and the lack of clear guidance from tax authorities only worsens the situation. That is why we’ve compiled the top crypto tax myths to debunk them and help investors and traders navigate the complex world of crypto taxation.
- 1. You’re Only Taxed When Selling Crypto for Fiat Currency
- 2. Tax Authorities Can’t Track your Crypto Transactions
- 3. Airdrops and Hard Forks aren’t Taxable
- 4. Staking Rewards aren’t Taxable
- 5. Reporting Crypto isn’t Necessary If you Don’t Make any Profit
- 6. Trading Crypto on DEXs Allows you To Avoid Taxes
- 7. NFTs – Collectibles or Property?
- 8. You Can’t Purchase a Crypto Within 30 Days of Selling it
- Final Thoughts
1. You’re Only Taxed When Selling Crypto for Fiat Currency
The first crypto tax myth is you’re only taxed when selling crypto for fiat currency. While it’s not false that selling crypto for fiat currency is a taxable event, it’s not the complete picture.
In the US, and in most countries, you trigger a taxable event when an asset, crypto, in this case, changes ownership. This is also called a disposal event. Mostly, these transactions are subject to capital gains taxes. However, based on where you live, this may differ.
So, what are some common crypto transactions viewed as disposal events by tax authorities that you may not know of?
Crypto-to-crypto transactions: When you’re selling one cryptocurrency to buy another, you’re essentially disposing of your previous coin, triggering a taxable event, which you must report to the IRS.
So, for example, if you buy 13 ETH with 4 BTC, you’re disposing of your 4 BTC. You must report this transaction on your tax report. And if the prices of those 4 BTC increased since you initially bought them, you’ll also be liable to capital gains taxes.
Yield farming or staking crypto: We’ve written in-depth guides on yield farming and crypto staking, discussing their tax consequences.
In the US and in most countries, there are no clear, specific guidelines on crypto staking by the IRS. However, based on the existing framework, it seems that staking crypto, more specifically, locking in your crypto for a token that represents your holdings, is also viewed as a disposal event, similar to crypto-to-crypto transactions.
Income and Rewards: While receiving income in crypto or rewards earned from mining doesn’t constitute a disposal event, they are still taxable. In most countries, receiving income or rewards for completing a task, such as crypto mining, is taxed at income tax rates.
Long story short, selling crypto for fiat currency is not the only instance when you’re subject to taxes, and now you know why.
2. Tax Authorities Can’t Track your Crypto Transactions
The myth that “crypto transactions are untraceable” is an old one. But contrary to popular belief, crypto transactions are not untraceable. In fact, all crypto transactions and public addresses are recorded in a public blockchain, which ANYONE can view
The identity of the public address, however, could be anonymous if the user is using a decentralized platform, though there are still ways for authorities to determine their identity.
But that is unnecessary, as most people use centralized exchanges.
And in most countries, crypto exchanges must report user transaction information, including buy/sell orders, transfers, and withdrawals, to their tax authority. For instance, in the US, Kraken must report to the IRS to continue operating there.
Plus, companies offering financial products and services are obligated by law to verify user identities through KYC (Know Your Customer). So, not only can they identify individuals who are avoiding taxes, but also learn their identities.
3. Airdrops and Hard Forks aren’t Taxable
Airdrops and hard forks are indeed tax-free in many countries. But not all.
Airdrops are subject to income taxes in most countries except Germany and Canada. Read our guide on airdrops and their tax consequences to know more.
As for hard forks, it’s a little tricky. We’ll give you the broad strokes, but if you want to dive deep, read our guide on crypto forks.
That being said, hard forks are subject to the same tax implications as airdrops (income taxes) in the United States, Japan, The Netherlands, Spain, Switzerland and India. It is, however, tax-free in Brazil, Sweden, the United Kingdom, Denmark, Austria, Australia and Germany.
We’ve written in-depth crypto tax guides on all these countries. Click here to check them out.
4. Staking Rewards aren’t Taxable
This myth is not without merit. In the US, the IRS has clear guidelines on newly created property – only taxed when sold, not when created. We also know that crypto is treated as property. So, based on this information, it’s pretty clear that staking rewards (and mining rewards) should be tax-free since they are newly minted (created) coins (property).
But that is not how it’s taxed in the US and in most countries. Similar to mining rewards and crypto income, staking rewards are also subject to income taxes.
Some might say it’s not fair, and they have a point. In fact, the recent Jarrett v. United States lawsuit was exactly about this – a taxpayer challenging the IRS on their tax treatment on staking rewards.
5. Reporting Crypto isn’t Necessary If you Don’t Make any Profit
One of the biggest misconceptions about crypto taxes (and taxes in general) is that you only have to report gains. Not true.
You need to report all of your crypto sales, including the ones you incurred losses in. Failing to report your losses means you won’t be able to offset them against your gains later on.
Not complying with your country’s tax regulations can result in hefty fines and penalties. So, stay on the right side of the law and report all your crypto transactions whether you make a profit or not.
6. Trading Crypto on DEXs Allows you To Avoid Taxes
Earlier, we briefly discussed how trading on decentralized exchanges allows you to stay anonymous. However, anonymity doesn’t make you immune to your country’s tax laws, or any laws for that matter.
Tax evasion is a serious criminal offense. So, unless you’re planning to commit a crime and prepared to face its consequences, pay your taxes accurately whether you trade on CEXs or DEXs.
7. NFTs – Collectibles or Property?
While there are definitely some crazy crypto tax myths out there, this particular issue of whether NFTs are treated as collectibles or property by the IRS is more of a gray area in the US crypto tax laws.
The IRS says NFTs are treated as property for tax purposes. However, some NFTs, like NBA Top Shots, might be classified as collectibles.
Why does this matter? Because the tax rate on collectibles can be as high as 28%, while the tax rates on property range from 0-20%.
Unfortunately, we don’t have a definite answer, but roughly speaking, most NFTs will still be considered property. Read our guide on NFT taxes to know more. If you’re unsure, we suggest you consult a tax professional.
8. You Can’t Purchase a Crypto Within 30 Days of Selling it
Tax loss harvesting is an excellent way to utilize your losses to reduce taxes. But has it ever crossed your mind that you can sell your crypto, incur the gains and buy it right back?
It probably has, but you already know about the wash sale rule.
The wash sale rule is a tax law that prevents taxpayers from claiming losses on assets they repurchase within 30 days of selling or pre-purchase before 30 days of selling.
While different countries have different laws around the wash sale rule, in the US, it only applies to stocks and securities, not crypto, since the IRS treats crypto as property.
This means you can repurchase your crypto within 30 days of selling it and still claim losses. The US government will close this tax loophole sooner or later, but until then, here is how you can reduce your taxes utilizing the wash sale rule.
As we said before, increasing regulation with the lack of nuanced guidelines is the cause of rising confusion and misinformation among taxpayers. However, we’ve effectively debunked some of these crypto tax myths today, which will hopefully help clear up some of the confusion.
In the coming years, it’s crucial that different governments invest more time and resources into understanding the nuances and intricacies of the crypto economy and transactions to develop better, more precise guidelines that will benefit both taxpayers and regulators alike.
Are you only taxed when selling crypto for fiat currency?
No, you are taxed when an asset, crypto in this case, changes ownership, including crypto-to-crypto transactions and yield farming or staking crypto. Income and rewards are also taxable.
Can tax authorities track your crypto transactions?
Yes, tax authorities can track your crypto transactions because all crypto transactions and public addresses are recorded in a public blockchain, and centralized exchanges must report user transaction information to their tax authority.
Are airdrops and hard forks taxable?
Airdrops are subject to income taxes in most countries except Germany and Canada, while hard forks are taxable in some countries and tax-free in others.
Are staking rewards taxable?
Yes, staking rewards are taxable as income taxes in the US and most countries, even though they are newly minted coins.
Do you have to report crypto even if you don’t make any profit?
Yes, you need to report all of your crypto sales, including the ones you incurred losses in, to offset them against your gains later on. Not complying with your country’s tax regulations can result in hefty fines and penalties.