Crypto and Tax Authorities: What you should know in 2024
Our Chief Legal Officer, Dr. Max Bernt, explains why you need to pay attention to tax regulations.
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tl;dr
- The legal landscape regarding crypto taxation is constantly evolving.
- Tax authorities are establishing frameworks to receive transaction reports from crypto asset service providers.
In recent years, crypto assets such as Bitcoin and Ethereum have become increasingly popular as a means of investment or payment. Against this background, they have also led to more or less large profits for investors.
However, one of the concerns surrounding cryptocurrency is the perceived anonymity it offers. While we know that some have used crypto assets to escape state scrutiny, tax obligations in particular, others were simply unaware that crypto transactions, or more precisely, the resulting profits, are taxable at all.
As a result, many are now asking whether public authorities can effectively track crypto transactions for tax purposes and, in particular, whether they can do so not only for the present but also for the past.
In this blog post we therefore would like to address the issue of tracking crypto transactions for tax purposes from the perspective of both the authorities and the individual.
In order to do so, we will underline the importance of understanding the tax implications of any cryptocurrency investment and discuss the challenges faced by authorities in tracking these transactions as well as the rules being developed to overcome them.
We will also briefly summarize the legal landscape around the taxation of crypto assets and point out what steps individuals and companies can take to ensure that they are compliant not only with tax laws but also with regard to proofs of funds.
Hence, whether you're an investor or a business owner who accepts crypto payments, this blog post will provide you with valuable insights into the current state of cryptocurrency taxation and the measures being taken to enforce it.
By the end of this post, you'll have a better understanding of how authorities can review crypto transactions for tax purposes and what you can do to ensure you're staying on the right side of the law.
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Understanding the Tax Implications of Cryptocurrency Investment
While investing in and trading with crypto assets can be exciting and potentially profitable, it's important to understand the tax implications of your actions. This is particularly important since, as of today, almost all jurisdictions have recognized the tax relevance of crypto assets.
However, there are substantial differences in how individual states tax the resulting profits.
Crypto Taxes USA
In the US, for example, the IRS views crypto assets as property for tax purposes, meaning that any gains made from selling or trading crypto assets are subject to capital gains tax.
The tax rate can vary depending on your income and how long you held the corresponding asset. If you held it for more than a year, it may qualify for long-term capital gains, which are taxed at a lower rate.
Find more information in our extensive tax guide: Crypto Taxes in the U.S.
Crypto Taxes in Europe
In Europe, on the other hand, the tax implications of crypto investments can vary greatly from state to state.
While in some countries such as Germany and France gains from crypto assets are subject to income tax, in other countries such as the UK, Austria and Switzerland they are mainly treated as capital gains tax.
Again, the tax rate can vary depending on the country and how long you have held a crypto asset. It is beyond the scope of this article to give an overview, but on here you can find more information about the national tax systems:
Hence, regardless of where you live, it is important to keep up to date with the tax laws surrounding cryptocurrencies and keep detailed records of all crypto transactions so that you can report them correctly on your tax return - not only for your personal benefit (e.g., due to holding period or tax-loss harvesting), but also to avoid potential fines or other legal consequences for misreporting.
Overall, we want to emphasize that understanding the tax implications of investing in cryptocurrencies is crucial to making informed decisions and avoiding unexpected liabilities.
The truth is, however, that it is particularly difficult to keep track of your tax relevant figures for crypto assets, as there are mostly a multitude of factors that have to be treated differently (e.g., staking, lending, aidrops, NFTs etc) and that are not even yet clearly defined by law. It is therefore not surprising that most have difficulties in taking appropriate measures to comply with all applicable laws and regulations.
That is why we at Blockpit have set ourselves the goal, unlike all our competitors, of not just offering a generic crypto tax software solution where you still have to categories transactions according to each individual tax regime yourself.
Instead, we offer expert-tested country-specific solutions that map local tax rules in code and save you from having to deal with this in more detail.
Do Crypto Asset Service Providers and Exchanges like Coinbase, Binance or Kraken report to Tax Authorities?
First of all, there is no definitive answer to the above question; at least not yet. This is because the specific reporting requirements for crypto asset service providers, so-called ‘CASPs’, may vary depending on the jurisdiction in which they operate and the nature of their activities.
In the United States, for example, cryptocurrency exchanges are required to comply with IRS regulations and report transactions of their users to the tax authority. This includes providing 1099 forms to users who have earned income from their crypto activities, such as trading or staking rewards.
In the European Union, on the other hand, CASPs have so far “only” had to comply with EU anti-money laundering (‘AML’) standards; there is not yet a tax-related reporting obligation in this respect. However, this is about to change, not only in Europe, but globally.
In October 2022, the OECD adopted the “Crypto Asset Reporting Framework” (‘CARF’) which shall put a stop to tax evaders on a global scale. In fact, CARF will set minimum reporting requirements for CASPs, particularly exchanges, not only for OECD’s 38 member states, including all member states of the EU, the US, UK, Switzerland, Australia, Canada, Mexico, Israel, Japan, and Korea, but also the member states of the G20 and those countries that have implemented the Common Reporting Standards (‘CRS’).
To put it simply: Soon, in most countries, not only will individuals have to report tax-relevant information on their crypto transactions to the authorities, but also CASPs, especially exchanges.
Moreover, as recently as 8 December 2022, the European Commission published its own directive for tax reporting obligations for CASPs, the so-called ‘DAC8’.
In this regard, Blockpit acts as the leading representative of the industry and participates directly in the negotiations taking place in Brussels. Hence, we can already say with certainty that some things will change significantly.
In particular, DAC8 will enable the tax authorities of the EU member states to communicate more easily not only with each other but also with CASPs. De facto, exchanges and other CASPs will be obliged to disclose all tax-relevant aspects of their users' crypto-transactions.
Ultimately, the possibilities of the tax authorities will therefore change considerably: From a system in which they were previously limited to the information provided by each individual, they will now also receive information from those who actually carry out or proceed the transactions.
As a result, this system of “checks and balances” will of course also drastically change tax transparency, as authorities no longer have to rely solely on the data provided by individuals. Instead, the authorities now have a large pool of transaction data that they can use in tax audits and are already eagerly working on technical solutions to be able to implement this accordingly.
Also, we would like to note that the belief that crypto exchanges operate in a legal gray area and generally do not want to report is a widespread misconception. Quite the contrary, due to recent developments, becoming state-accepted financial market participants is now at the top of the priority list for every major crypto exchange.
In this context, the new reporting obligations of the CASPs, especially exchanges, naturally also open up completely new possibilities for authorities to review for past tax years.
Many states (most recently Italy, for example) therefore allow their citizens to voluntarily make tax declarations on their crypto gains for past years, which result in an exemption from penalties in case they have not reported anything yet.
Hence, crypto tax compliance is more important today than ever before.
How can I ensure that I comply with applicable tax law and what are the differences between the Crypto Tax providers out there?
Due to the developments mentioned above, the question arises how I, as someone who has invested in crypto, can comply with these extensive tax reporting obligations.
Of course, against the background of the characteristics of crypto assets, one has to be realistic: Appropriate and accurate crypto tax management is faced with many obstacles, especially when facing this challenge all on your own.
Unfortunately, there is no one-size-fits-all solution. This particularly, since tax regimes usually differ quite significantly from country to country, treating various transaction types (e.g., trades, staking rewards, fees, airdrops) and asset classes (e.g., stablecoins, asset-referenced token, NFTs, derivatives) differently for tax purposes. Multiply all these variables by the need to calculate gains and losses for each crypto transaction, and you find yourself with a Gordian knot to untie.
Hence, what might sound clear and simple in theory quickly becomes complex in practice.
If you conduct more than a handful of trades, you will soon reach the limit of what can be managed with simple tools like an Excel-sheet. And then there is also the issue of country-specific tax calculation rules and reporting forms.
Despite this, the business model of most crypto tax providers has not changed for years. Customers still need to use their generic tax calculation tools in order to create a somewhat compliant tax report. Of course, no one wants these tax reports to be reviewed in detail, especially considering that information from CASPs such as exchanges are now being added to the equation as well.
So, what should you do? The following key aspects for a proper crypto tax management can be identified:
a) Keep records of your transactions
The cornerstone for any form of tax compliance is keeping records of your transactions. Here are some ways you can keep such records:
- Use a spreadsheet
This is the simplest form of accounting and, in our view, should only be chosen if few transactions are carried out per year. For this, you can use a spreadsheet-program like Microsoft Excel or Google Sheets to create a record of your transactions. Make sure to include the date, type of transaction (buy/sell), amount of assets, the price of the assets at the time of the transaction, and any fees associated with the transaction. - Use a portfolio tracker
There are many crypto portfolio trackers available online that can help you keep track of your crypto transactions. These trackers automatically import data from your crypto exchanges and wallets, making it easy to track your investments and calculate your gains and losses. However, you should always make sure to choose a trustworthy provider like Blockpit, as there are unfortunately many dubious companies operating in this sector. - Use a tax software
If you are using cryptocurrency for investment and or trading purposes, you are most likely required to pay taxes on your gains. There are several crypto tax tools available that can help you calculate your tax liability based on your crypto transactions. However, keep in mind, that not every provider offers the same solutions. Even if the figures appear more attractive for some providers (e.g., because they show a lower tax burden), special care should be taken to ensure that the information provided is actually appropriate for the state in which the tax is levied. Make sure to read our comparison of the best crypto tax tools.
Whichever method you choose, make sure your records are up to date and accurate, and keep copies of all supporting documents (e.g., receipts or exchange statements) in case you need to present them later.
b) Stay on top of deadlines
The major importance of meeting tax deadlines is often overlooked. In fact, tax deadlines are not only important for the timely submission of tax reports, but also for tax-loss harvesting. The latter, because in many jurisdictions it is not possible to carry forward losses and profits can therefore only be offset within the same tax year. Besides, it is important to note that tax deadlines can vary from state to state and do not always coincide with the calendar year.
In order to stay on top of these deadlines and make the best use of tax-loss harvesting, you must therefore familiarize yourself with the tax law regime that is relevant to you. If you do not want to undertake these often tiresome efforts and at the same time want to be on the legally secure side, Blockpit enables you to do this fully automatically for each supported jurisdiction in a verifiable way.
c) Become familiar with country-specific tax regulations and tax forms
Of course, not only do tax regulations mostly differ from country to country, but also the forms used to file tax returns are specific to each country and therefore have to be filled out differently. Particularly in the case of crypto assets, this often involves a lot of time, money and stress, as due to the legal uncertainty that often exists, not even many experts know how to correctly qualify crypto gains and losses and therefore how to properly record them in the tax return.
Ideally, you should therefore use a software solution that has been tested, audited and recommended by leading tax advisors, such as the one from Blockpit, which has already integrated the country-specific tax laws and shows you where exactly you have to enter your profits and losses in your tax return.
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Conclusion
Overall, we see that the legal landscape for the taxation of crypto assets is rapidly evolving and will continue to do so. As to the question of whether tax authorities now will also receive reports from exchanges like Binance, Coinbase and Kraken, as well as from other crypto asset service providers on the crypto transactions of individual users, we have pointed out a clear answer: Yes, the legal framework is either already established or is being created to facilitate this (also retroactively).
Compliance with tax reporting requirements is therefore more critical today than ever before. However, we also highlighted that the preparation of a legally compliant tax return is not at all easy, especially in the case of crypto assets. There are many obstacles that first have to be overcome. Of course, you can decide to do it on your own, but limits quickly become apparent in most cases. Especially for those who do not only carry out a small number of crypto transactions per year, it is therefore advisable to use a suitable software solution.
When it comes to using such software solutions, it is particularly important to be able to rely on a trustworthy partner. This is especially true when you consider that the information provided contains highly sensitive financial data and that it is therefore essential to ensure that it is processed in a particularly secure and GDPR-compliant manner.
For this purpose, Blockpit has created a unique server structure in Austria, which does not rely on third-party cloud services and is regularly audited with regard to the GDPR and other relevant data protection laws. Besides, Blockpit’s extensive asset database covers not only “traditional” crypto assets but also NFTs and the like, their chronological price data and specific tax treatment in various jurisdictions.
In conclusion, we hope that this blog post has clearly highlighted some unanswered questions on the topic of tax transparency, in particular on the audit possibilities of the tax authorities. Our goal is to sufficiently educate the community and to create incentives to deal with this rather delicate matter on one's own in order to be able to comply with the applicable law. However, we would like to emphasize that you are not alone in this. Blockpit acts as a trustworthy partner that supports you and your crypto tax management not only effectively, but also in a legally secure manner.
FAQ
Do crypto exchanges report to the tax authorities?
Yes, crypto exchanges, also known as Crypto Asset Service Providers (CASPs), are increasingly reporting to tax authorities. This is determined by jurisdiction-specific regulations, such as the IRS regulations in the United States which require crypto exchanges to report user transactions. Additionally, global measures like the OECD's Crypto Asset Reporting Framework (CARF) and the European Union's DAC8 directive further mandate CASPs to report tax-relevant information to authorities.
Are crypto transactions anonymous?
Crypto transactions are not fully anonymous due to regulatory compliance requirements by crypto exchanges or Crypto Asset Service Providers (CASPs), which mandate them to report transaction details to tax authorities. Moreover, global initiatives like the OECD's Crypto Asset Reporting Framework and the EU's DAC8 directive enforce standardized reporting, enhancing tax transparency. This is why it is crucial for crypto investors to accurately document and report their crypto transactions to the tax authorities.
How are cryptocurrencies taxed?
Cryptocurrency taxation can differ considerably between countries and jurisdictions. You can find all the information you need in our exhaustive crypto tax guides, which are available for:
Max is a distinguished expert in transnational criminal law, holding a PhD from the University of Vienna/University of Queensland (summa cum laude). His professional journey includes several years of practice as a lawyer in Vienna, with a specialization in criminal law, and he has successfully passed the Austrian judge exam. Currently, Max contributes significantly to Blockpit by chairing the INATBA finance working group and frequently advises and speaks on crypto-related regulation.