Within a considerably short time since its inception, cryptocurrencies have undeniably become a major part of the international economy, with leading countries like the United States of America and England not left out of the frenzy. The topic of crypto assets can be quite attractive and interesting, as you must have seen with our consistent efforts to provide direct insights here on Tokizie. However, the intricacies of crypto is still considered a complex phenomenon by some who find it hard to understand.
Many enthusiasts seek to understand the process of mining cryptocurrencies as well as the numerous platforms on the web where crypto can be bought and traded. Among the plethora of crypto inquisitions, the frequent question on the lips of many, particularly local crypto investors from the US and England, as well as foreign investors has been that of crypto legislation and tax declaration.
Similar to traditional assets like real estate or stocks, cryptocurrencies, being a form of investment, are subject to regulations and taxes in both the US and England. As the world of cryptocurrencies has expanded in recent years, governments have had to swiftly establish jurisdiction and rules to address the unique challenges posed by these digital assets. This ensures that the taxation and legal aspects of cryptocurrencies align with the established frameworks governing other types of investments.
The popularization and continued adoption of cryptocurrencies have led to well-established rules and guidelines that must be legally followed when delving into the crypto market and intending to invest in these very interesting virtual currencies.
In this article, we will provide you with a broad overview of the tax legislation in the USA and England on cryptocurrency and also the options available to you in terms of tax declaration each year. You will be able to find answers to all your possible questions concerning the taxation of the crypto world, from the dos and don’ts, and mandatory declaration of crypto assets, to professional advice with the presentation of the different tax rates.
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Tax rates on cryptocurrencies in the USA
- Up to 35% tax on short-term capital gains and crypto income
- Between 0% to 20% on long-term capital gains and crypto income
Tax rates on cryptocurrencies in the UK
- Between 0% to 20%, depending on your income
Crypto Tax Legislation in the USA
Unlike other countries that introduced taxes on cryptocurrencies in recent years, the legislation of taxes in the US began in 2014 when the Internal Revenue Service (IRS) issued “Notice 2014-21, 2014-16 I.R.B. 938” to treat taxes for crypto assets. The framework explained how Bitcoin and other cryptocurrencies are viewed as property from a tax perspective and as such, are treated for Federal income tax purposes. The document also outlined the two main taxes that are applicable: Income Tax and Capital Gains Tax.
Throughout this article, we will distinguish between Income Tax and Capital Gains Tax, as well as other taxes that have been introduced over the years. This will help you understand the difference and provide a perspective on what is required if you want to become a professional investor. We will also consider the changes in taxation that have occurred to date, including the 1099 forms and new guidance for crypto brokers (including DeFi exchanges) and crypto staking.
Crypto Income Tax
As the term implies, crypto income taxes are levied on crypto-related activities that result in earning an income or being paid in cryptocurrency for work done. These activities are treated as income earned and as such, are taxed as regular income using regular income rates.
The IRS provided applicable guidelines, which are updated periodically on when cryptocurrency counts as income rather than capital gain and how they are treated under tax compliance laws. The activities that constitute crypto income include but are not limited to:
- Crypto Mining: the act of mining crypto is a taxable activity, where tax is calculated according to the “fair market value” of the crypto at the time they were transferred into the crypto wallet of the miner.
- Crypto Payments Received: If you receive payment for work done, whether on a regular or contract basis, then you are expected to pay crypto income tax in the US. The tax for crypto payments received is charged according to your tax bracket.
- Crypto Receipts for Goods and Services: If you accept crypto as a means of payment for goods and services, you are expected to report those receipts to the IRS as part of your income.
- Crypto Staking: Similar to crypto mining, crypto staking rewards are charged based on the fair market value, or at the time the rewards are received.
- HODLing Crypto: Another income that is considered taxable income is the crypto reward that is earned by holding another crypto. For instance, if you earn USD coins by holding a certain crypto, it falls under the income tax bracket.
- Reieing Coins from a Hard Fork: Taxes on crypto you got from a hard fork depend on how you use the asset when it’s available to withdraw from your exchange and more.
- Receiving an Airdrop: Airdrops received from crypto companies as giveaways or part of their marketing campaigns are also considered taxable income. As such, they are to be reported when filing taxes.
- Other Crypto Rewards: In addition to the above, other rewards such as referral bonuses, earning interest through lending protocols, earning new liquidity pool tokens, governance, or reward tokens on DeFi protocols, Learn to earn rewards, Watch to earn rewards, Browse to earn rewards, and GameFi rewards.
How to Calculate Crypto Income Tax
Calculating your Crypto income is quite simple but can also be time-consuming when you have a steady income flow. What you need to remember is that your crypto income is the fair market value of the crypto you received in USD on the day you received it. This represents the sum you’ve earned and the portion subject to taxation at both your Federal Income Tax rate and, potentially, your State Income Tax rate.
Crypto Capital Gain Tax USA
As explained earlier, cryptocurrencies are treated by the state as capital assets when it comes to tax legislation. This means that taxes are charged when crypto assets are disposed of. This tax is known as the Crypto Capital Gain Tax and is charged on every profit, that is, capital gain made by an investor whenever they decide to dispose of a cryptocurrency.
The question then is, what constitutes the disposal of a crypto asset? The IRS outlines scenarios that can be considered as disposal of crypto:
- When crypto is sold for fiat
- When crypto is sold in exchange for another crypto
- When crypto is spent in exchange for goods or services
Types of Capital Gains
You have to understand that there is no universal rate for capital gains. Rather, the gains are treated according to general capital gain tax principles. This implies that the rate to be paid in taxes depends on how long the assets are held and the amount that was earned.
There are two types of capital gains as identified by the IRS: Short-term Capital Gain and Long-term Capital Gain. Short-term capital gain is calculated as gains on assets held for less than one year and long-term capital gains are made on assets held for over one year.
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Short-term Capital Gain
The rates for crypto gains on digital assets held within a year are the same as rated on taxable income, under the Federal Income tax bracket. These rates can range from as low as 10% to as high as 37%, depending on the value of the asset and tax bracket.
We will provide you with the 2023 Federal Income tax rates as well as the rates for 2024 that were updated by the IRS earlier in November. The rates apply to single individuals, heads of households, married couples filing jointly, and married couples filing separately
Here are the 2023 Federal Income tax rates:
| Tax Rate | Single | Head of Household | Married filing jointly | Married filing separately |
| 10% | $0 to $11,000 | $0 – $15,700 | $0 – $22,000 | $0 – $11,000 |
| 12% | $11,001 – $44,725 | $15,701 – $59,850 | $22,001 – $89,450 | $11,001 – $44,725 |
| 22% | $44,726 – $95,375 | $59,851 – $95,350 | $89,451 – $190,750 | $44,726 – $95,375 |
| 24% | $95,376 – $182,100 | $95,351 – $182,100 | $190,751 – $364,200 | $95,376 – $182,100 |
| 32% | $182,101 – $231,250 | $182,101 – $231,250 | $364,201 – $462,500 | $182,101 – $231,250 |
Also, here are the newly updated 2024 Federal Income tax rates:
| Tax Rate | Single | Head of Household | Married filing jointly | Married filing separately |
| 10% | $0 to $11,600 | $0 to $16,550 | $0 to $23,200 | $0 to $11,600 |
| 12% | $11,600 to $47,150 | $16,551 to $63,100 | $23,201 to $94,300 | $11,601 to $47,150 |
| 22% | $47,150 to $100,525 | $63,101 to $100,500 | $94,301 to $201,050 | $47,151 to $100,525 |
| 24% | $100,525 to $191,950 | $100,501 to $191,950 | $201,051 to $383,900 | $100,526 to $191,950 |
| 32% | $191,950 to $243,725 | $191,951 to $243,700 | $383,901 to $487,450 | $191,951 to $243,725 |
| 35% | $243,725 to $609,350 | $243,701 to $609,350 | $487,451 to $731,200 | $243,726 to $365,600 |
| 37% | $609,350+ | $609,350+ | $731,201+ | $365,601+ |
| 35% | $231,251 – $578,125 | $231,251 – $578,100 | $462,501 – $693,750 | $231,251 – $346,875 |
| 37% | $578,126+ | $578,101+ | $693,751+ | $346,876+ |
Long-term Capital Gain
Unlike the short-term capital gain that is charged on any amount, the long-term capital gain tax is only charged on earnings of $44,626(including your crypto) and above. Earnings that fall below this threshold are not regarded as taxable gain and you will be charged either 15% or 20% on $44,626 and above, depending on your taxable income.
The long-term Capital Gains Tax rates for the 2023 tax year are as follows:
| Tax Rate | Single | Head of Household | Married filing jointly | Married filing separately |
| 15% | $44,626 – $492,300 | $59,751 – $523,050 | $89,251 – $553,850 | $44,626 – $276,900. |
| 20% | $492,301+ | $523,051+ | $553,851+ | $276,901+ |
The long-term Capital Gains Tax rates for the 2024 tax year are as follows:
| Tax Rate | Single | Head of Household | Married filing jointly | Married filing separately |
| 15% | $47,026 to $518,900 | $63,001 to $551,350 | $94,051 to $583,750 | $47,026 to $291,850 |
| 20% | $518,901+ | $551,351+ | $583,751+ | $291,851+ |
Earlier in March this year, U.S. President Joe Biden proposed to double capital gain taxes from 20% to 40% for earners above 1 million dollars. There were also plans to clamp down on crypto wash sales – as a strategy where a trader sells at a loss and then buys back immediately for tax purposes. The increase in rates is however yet to be adopted as you can see that it was not reflected in the 2024 rates that were recently released.
How to Calculate Crypto Capital Gains
When engaging in the sale, trade, or expenditure of cryptocurrency, it activates a capital gain or loss scenario. A positive outcome results in a capital gain, whereas a negative outcome signifies a capital loss. To compute your gain or loss:
Ascertain your cost basis, which includes acquisition cost and any associated fees. If the cryptocurrency was received as a gift, utilize its fair market value in USD on the day of receipt.
- Cost Basis Formula: Deduct the cost basis from the sale price to determine your gain or loss.
- Crypto Gain Formula: In the case of a gain, you will be subject to Capital Gains Tax on that profit.
In instances of a loss, although you won’t be liable for Capital Gains Tax, it’s important to monitor these losses as they can be offset against gains. More details on this will be provided.
Let’s illustrate this with an example:
Suppose you purchased 5 ETH in June 2022 for $4,200 (inclusive of a 3% fee). Later, in January 2023, you sold it for $15,000. The capital gain is calculated by subtracting the cost basis from the sale price ($15,000 – $4,200), resulting in a $10,800 capital gain.
Assuming an annual income of $120,000 in 2023, taxed at a rate of 28%, and with this $10,800 crypto gain, you remain within your existing tax bracket. As a result, you owe 28% of the gain, amounting to $3,024 in taxes.
Reporting your Crypto to the IRS
An important detail for you to know is that the U.S. tax year spans from January 1 to December 31. However, the reporting and payment deadline for all crypto assets falls on April 15 of every year. This means that you are expected to have filed your 2024 crypto taxes on or before the 15th of April. Exemptions to this rule include U.S. expatriates, who are granted an extension until June 15, and individuals who have applied for a tax extension through Free File or Form 4868, affording them until October 16 to fulfill their tax obligations.
Crypto Tax Legislation UK
Crypto law in the UK is quite similar to the crypto legislation in the US. This is seen in how the Government of the UK views digital assets and how they are treated when it comes to taxes.
His Majesty’s Revenue and Customs (HMRC) in its policy paper published in 2018 explains that crypto-assets (or ‘cryptocurrency’) are cryptographically secured digital representations of value or contractual rights that can be either transferred, stored, or traded electronically. HMRC classifies crypto assets into three main categories: exchange tokens, such as Bitcoin and Ethereum, utility tokens, and security tokens. Although the guidelines encompass all these types, it’s important to note that the tax treatment for utility and security tokens might vary, even though this distinction isn’t explicitly outlined.
HMRC does not consider cryptocurrency to be fiat currency or money. Under UK crypto tax rules, earnings on disposed crypto assets are treated as investments and thereby subject to capital gains and income taxes.
Crypto Capital Gain Tax UK
As already established, crypto capital gain taxes are charged when disposing of crypto assets. HMRC defines disposal as selling crypto for fiat, exchanging one cryptocurrency for another cryptocurrency, and giving away crypto to another person (as a gift or in exchange for goods or services).
All taxpayers who earn capital gains in the UK are only required to pay capital gains tax on overall gains above the annual exempt amount. In November 2022, the HM Treasury announced in their Autumn Statement that the annual exempt amount would change from £12,300 to £6,000 effective April 2023.
Individual crypto activities that are taxable include:
- Gains over £12,000
- Income received from Bitcoin mining, airdrops, or DeFi rewards
- Crypto received as salary
The rate you are required to pay on your capital gains tax can range from 0% to up to 20%, depending on your income.
| Tax Rate | Income Bracket |
| 0% | £0 to £12,570 |
| 10% | £12,571 to £50,270 (Basic Rate Income) |
| 20% | ££50,271 to £150,000 (Higher Rate Income) |
| 20% | over £150,000 (Additional Rate Income) |
Crypto Income Tax UK
When you engage in crypto-related activities such as mining, receiving airdrops, or receiving cryptocurrency in exchange for goods or services, it’s crucial to be aware that these earnings fall under the purview of income tax. As a result, you as a taxpayer are obligated to fulfill your national insurance contribution.
The best way to ensure compliance with tax and crypto laws is to understand the nuances of income tax rates. The following outlines the tax rates based on different income brackets:
| Tax Rate | Taxable Income Brackets |
| 0% | £0 to £12,570 (personal allowance) |
| 20% | £12,571 to £50,270 (Basic Rate Income) |
| 40% | ££50,271 to £150,000 (Higher Rate Income) |
| 45% | over £150,000 (Additional Rate Income) |
Fees and rewards earned from crypto mining can take two forms for income tax purposes: trading income or miscellaneous income. The category depends on factors such as the level of activity, organizational structure, and overall commercial nature of the crypto-related activities. In addition, crypto assets obtained through these activities become subject to capital gains tax when the gains are realized, but the costs associated with mining are generally not deductible.
Reporting your Crypto to HMRC
While there is no specific obligation to declare the holding of crypto assets to HMRC, you are expected to declare your gains, losses, and income.
Regulations by HMRC provide that individuals who fail to report gains may be subject to a 20% Capital Gains Tax as well as interest and penalties up to 200% of the taxes owed. In addition to financial penalties, those who consistently and intentionally avoid payment of taxes may be charged with tax crimes and do jail time.
We recommend that you do not take the risk of not reporting your crypto gains to HMRC. It is better to remain tax-compliant and accurately file all income and capital games within the stipulated timeline. If you have not been disclosing your income and capital gain over the years and would like to get your tax up to speed, you can submit what is called an amended self-assessment tax return.
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