At this time of year, of course, many people are once again working on their Income Tax returns. One of the topics then is tax returns, Bitcoin and crypto. Do you actually have to file a tax return on your crypto assets? If so, how do you file taxes on Bitcoin and crypto? We answer these and other questions in this article. We start, of course, with the most important question.
Do you have to pay taxes on crypto?
The answer to this question is “yes” in most cases, yet there are some exceptions. We will first discuss the exceptions and then go into the various situations and how you should handle them in your income tax return.
Is Bitcoin and crypto tax free?
In some cases, a holding in Bitcoin and crypto is indeed tax-free. This may be the case when you engage in mining Bitcoin or other crypto currencies, but only when the costs exceed the revenues.
Another case is trading in crypto. This is considered the same in trading as foreign currency. So as long as it is purely speculation on price gains you do not have to declare any income. However, you cannot deduct costs either.
For the rest of the article we will focus on taxes on owning Bitcoin and crypto. If you think you fall under one of the exceptions you can read more about crypto and tax here.
How do you pay tax on Bitcoin and crypto?
The tax authorities use as the basis for calculating your taxable income from Bitcoin and crypto your balance on January 1 of the year on which you file your tax return. So if you are filing an income tax return 2021, you must file a tax return on the value of your crypto holdings on January 1, 2021.
How do you calculate the value of Bitcoin and crypto on January 1?
Each platform uses its own exchange rate for Bitcoin and crypto currencies. So it’s best to look up the prices and your balances as of January 1, 2021 on the platform(s) where you had your Bitcoin and other crypto as of January 1, 2021. This will allow you to calculate the value of your crypto holdings as of January 1.
What should you do with crypto you bought or sold in 2021?
For the tax authorities, it doesn’t matter what you bought or sold in crypto assets during the year. They look purely at the value on January 1. So if you had 100 on January 1 and sold everything on January 2 you declare 100. If you had 0 on January 1, but bought 100 on January 2, you indicate 0.
How do you account for Bitcoin and/or crypto value increases/decreases in 2021?
Again, the tax authorities look purely at the value on January 1, 2021. So if your crypto has become worth more or less during the year, it does not matter for the tax return.
Where do you declare ownership of Bitcoin and crypto coins?
The tax authorities view Bitcoin and crypto ownership as income from assets and are taxed in Box 3 of income tax. This consists of 3 brackets. The amounts per bracket apply to all income from assets. This means that if you have other income from assets besides owning Bitcoin and/or other crypto, you should take the total income.
In addition, specific provisions apply if you have a (supplementary) partner. All information on calculating tax on income from assets can be found here. Of course we are not tax experts and we do not want to give tax advice. Always do your own research and/or consult a tax advisor.
Can I deduct expenses for owning Bitcoin and crypto?
No, unfortunately you may not. The tax authorities look at the value on the reference date January 1 of each year. So costs during the year are not taken into account.
Minor children and crypto ownership, how does that work?
If your minor children trade in crypto independently, they cannot yet file their own tax return. You must then add their crypto property, also at its value as of January 1, to your assets. Of course, certain considerations also apply here when dividing that allocation among the (divorced) parents’ returns. Again, this is fodder for a good tax advisor.
Can the IRS see your crypto?
Some people wonder if the tax authorities can see your crypto. They therefore consider not declaring their crypto holdings. However, this is a misconception.
In fact, the tax authorities can actually see your crypto. In fact, some crypto platforms report their customers’ crypto holdings to the tax authorities on their own initiative. Investment platform eToro was in the news extensively with this in 2019. If you already see an amount as income from Bitcoin or crypto in your pre-completed tax return, you can assume that the platform has already declared your crypto assets (as far as they are aware).
In addition, Dutch and European investment platforms are required to comply with KYC regulations. This means that they have to report unusual transactions anyway. The tax authorities or police may also request your details and assets from a (crypto) investment platform if it falls under Dutch/European supervision.
Incidentally, the tax authorities and/or police can also request bank account information to see if you have made payments to or received payments from crypto platforms.
Incidentally, if the tax authorities detect concealed crypto or Bitcoin holdings they will see this as ‘concealed assets’. This can lead to hefty fines and even criminal prosecution.
We can’t make it any more fun, but hopefully this explanation will make processing Bitcoin and crypto ownership in your income tax return easier.
Curious about the live Bitcoin price or want to know more?
After all the formalities, we can’t resist giving you a look at the value of Bitcoin and crypto. On the site of Tradeincrypto.com you can see all live crypto prices 24 hours a day.
Also, of course, we are here if you want to know more about (crypto) investing.
Want to stay up to date with the latest price developments?
You can always follow the developments yourself with our WANT crypto analyses or the background articles and previews on the crypto market and Bitcoin. Of course, you can also follow the live quotes 24 hours a day if you want to stay informed in real time. Are you interested in other investments besides crypto? Then our weekly Monday morning price forecast might be a reading tip. “Please note: We never give financial advice, so our contributions can’t be interpreted that way either. Always do your own research and decide on rational grounds if, when, what and how much you want to invest in.”