Cryptocurrencies have become a popular investment instrument, but from a tax perspective they are still a relatively new and often misunderstood topic. In this article, we provide key information on cryptocurrency taxation to help you understand your obligations as an investor.
However, we remind you that this article is for informational purposes and does not constitute legal or tax advice. We recommend that you consult a tax advisor for accurate information regarding your situation.
When should you pay tax on cryptocurrencies?
For cryptocurrencies, the tax rules depend on the type of transaction you are involved in. In most countries, both the purchase and sale of cryptocurrencies, as well as the exchange of one cryptocurrency for another, are treated as taxable events. In addition, receiving cryptocurrency as compensation for work or services may also be taxable.
It is worth noting that the taxation of cryptocurrencies can vary from country to country. Therefore, it is advisable to familiarize yourself with the tax laws of your place of residence. For example, in Poland, cryptocurrencies are treated as assets, and the proceeds from their disposal are taxed on the same basis as capital gains. For more information on this topic, see our beginner's guide.
How to calculate taxable income?
Taxable income from cryptocurrencies can be calculated as the difference between the sale value and the purchase value of a given cryptocurrency. In the case of exchanging cryptocurrencies for other cryptocurrencies, this income is determined by the difference between the values of the cryptocurrencies as of the date of the transaction. Note that some countries use different methods of calculating the tax base, such as FIFO (first-in, first-out) or LIFO (last-in, first-out).
Staking, yield farming and other forms of making money on cryptocurrencies
With the development of the cryptocurrency market, there have been
new forms of earning are emerging, such as staking, yield farming and liquidity mining. In the case of staking, an investor locks up his or her cryptocurrencies to earn rewards in the form of new tokens. In the tax context, these rewards are usually treated as income and are taxed when received. Yield farming and liquidity mining operate on similar principles, except that investors provide funds to the liquidity pool in exchange for interest.
It is worth noting that the taxation of this type of income may vary from country to country. Therefore, we recommend that you check the regulations where you live and consult a tax advisor. For more information on staking and yield farming, see our articles: Yield Farming or Staking Cryptocurrencies? and What is Yield Farming?.
Record keeping and reporting obligations
As an investor, you should keep records of your cryptocurrency transactions, such as information on purchase and sale prices, transaction dates or cryptocurrency quantities. Depending on your country, you may be required to file a tax report showing your income and profits from cryptocurrencies.
We encourage you to familiarize yourself with your local tax laws and consult a tax advisor to make sure you meet all of your cryptocurrency tax obligations.
Summary
Cryptocurrency taxation can be complicated, but as an investor, you should understand your tax obligations and be prepared for possible audits. It's worth remembering to keep records and consult a tax advisor to avoid problems related to cryptocurrency taxation.
If you want to learn more about investing in cryptocurrencies and the tax aspects, we recommend reading our a beginner's guide and following our service to stay up to date with the latest news
