Crypto Income - How is it taxed?
For most people, when they think of taxes on crypto assets, their minds immediately jump to Capital Gains Tax. This is because before tax authorities had specified particular taxation rules on different crypto activities, the majority of transactions were subject to CGT. It was simple - if you made a gain on your crypto disposal, you had to pay CGT. So, what’s changed?
What’s considered income?
As the crypto industry develops and new processes are created, so too do new tax implications. Things like staking and yield farming which have seen a surge in popularity in the past couple of years could be seen as earning as income, depending on the rules upheld by your region’s tax body. Let’s have a look at the current rules of each region then, shall we?
What may be considered crypto income in Australia?
- Staking rewards: Additional tokens received from staking programs are considered by the ATO to be income. Staking rewards are currently taxed by the ATO according to your income bracket.
- Airdrops: The ATO states that the money value of an established token received through an airdrop will be taxed as ordinary income of the recipient at the time it is derived.
- Mining: The ATO says that if a crypto miner is categorised as a business entity, then any crypto earned from these activities will be treated as assessable income.
- Interest earned through DeFi programs: Based on the current ATO guidelines, at CryptoTaxCalculator our algorithm will categorise any interest earned as income for Australian users.
- Contracts for difference: There is existing guidance on "Contracts For Difference" from the ATO in which you are betting on the price movement of an asset whilst not owning the asset that crypto activity of this nature should be taxed as income. An example of this would be something like a MOVE contract.
- Being paid a salary in crypto: As you may imagine, getting paid in crypto assets is considered to be no different by the ATO as being paid a normal salary. As such, any crypto assets earned as a part of your job will be taxed as ordinary income.
For more info about crypto tax in Australia, read here.
What may be considered crypto income in the US?
- Airdrops: Any profit you earn from airdrops into your wallet, may be taxed as ordinary income by the IRS. The value of the cryptocurrency used is the fair market value of the token at the date and time you become the beneficial owner.
- Staking rewards: For an individual, you can earn interest by participating in staking, similar to the manner in which individuals can earn interest from bank deposits. Any interest earned from staking is likely viewed as an income tax event. This is currently under review with the IRS.
- Liquidity pools and LP tokens: While not specifically clarified yet by the IRS, there is a chance that liquidity pool interest could be seen as ordinary income.
- Hard forks: The value of the tokens received through a hard fork are taxable as income. To determine when these tokens are actually ‘received,’ the IRS defines this as when the transaction is ‘recorded on the distributed ledger’, and allows you to have control over the crypto asset such that you are able to sell, transfer or otherwise dispose of it.
- Mining: If you are mining as an individual hobbyist, then any profit you make will be taxed by the IRS according to your income bracket.
- Yield farming: Some protocols, known as yield aggregators, use the depositor’s funds for short term lending or investment to earn passive income for investors. The receipt of these rewards to the wallet would likely be considered income by the IRS.
For more info about crypto tax in the US, read here.
What may be considered crypto income in the UK?
- Mining: Mining has different tax implications depending on whether you are a hobby or business miner. For hobby mining CryptoTaxCalculator will calculate your initial cost basis as the market value when receiving the reward. This market value is also treated as income by the HMRC.
- Airdrops: The HMRC only considers airdrops as income tax if you did something to “earn” the reward. When you sell the airdrop, the cost basis is the market value at the time of receiving the airdrop reward. However if you did something to “earn” the airdrop, then the HMRC considers this miscellaneous income for tax purposes.
- Staking rewards: The HMRC has recently clarified that staking rewards are taxed as income. CryptoTaxCalculator will separate out staking rewards as income earned. Once you have earned income from staking, the initial value forms the cost basis for your capital gains or loss.
For more info about crypto tax in the UK, read here.
What may be considered crypto income in Canada?
In Canada, the CRA deems cryptocurrency activity to be either business income or a capital gain. In order to file your report correctly, you have to first determine if your particular activity is business income or not.
The following scenarios may be signs of business income:
- You carry on crypto activity for commercial reasons and in a commercially viable way
- You undertake crypto activities in a businesslike manner, which might include preparing a business plan and acquiring capital assets or inventory
- You promote a crypto product or service
- You show that you intend to make a profit by engaging with crypto, even if you are unlikely to do so in the short term
- Your crypto activities involve some regularity or a repetitive process over time
You should use these guidelines to determine with your local tax professional what will, or will not be, considered crypto income by the CRA.
For more info about crypto tax in Canada, here.
How to handle crypto income with CryptoTaxCalculator
In the CryptoTaxCalculator platform, we give you the ability to customize how your transactions are categorized. Once you’ve determined what is and isn’t classified as income in your region, you’ll be able to swap things around in the app to suit your personal circumstances best. If the rules in your particular region state that airdrops, for example, are considered assessable income, then you can categorize it as such in the app. We recommend working with a local tax professional if there are any grey areas you need help deciphering!
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