Crypto Taxation Guidelines: 2024 Cryptocurrency Tax Rules Explained

Surprisingly or not, you will likely pay a crypto tax from the income you made with digital assets. The percentage you will be asked to pay depends on how long you owned crypto and your income. What are the crypto tax guidelines for 2024 and beyond? Let's get the crypto tax explained in this comprehensive guide.

What is crypto taxation?

Cryptocurrency taxation is a complex and rapidly evolving field. As the popularity of cryptocurrencies like Bitcoin and Ethereum continues to grow, governments worldwide are struggling to keep up with the tax implications. In the UK, HMRC has established guidelines for crypto taxation, but it can still be challenging to navigate the rules and regulations. In this guide, we will provide an overview of crypto taxation in the UK, including the different types of crypto tax, calculating gains and losses, and reporting crypto income on your self-assessment tax return.

Types of crypto tax

Crypto taxation is the percentage you pay from the earnings from crypto mining, staking, or your specific circumstances. Cryptocurrency can be taxed as short-term capital gains, long-term capital gains, or ordinary income (which is pretty much similar to the taxes from stocks).

• Short-term capital gains tax is applied to the income you made for holding cryptocurrency for less than one year. The crypto tax can range from 10% to 37, depending on your income level.
• Long-term capital gains tax applies to the cryptocurrency held for over a year. The crypto tax rate ranges from 0% to 20%, depending on your income level.
• Ordinary income tax applies to mining, staking, and airdrops gains. In this case, the crypto tax rate ranges from 10% to 37%, depending on the income level.

Capital gains vs income tax events

If you need clarification on these two terms and help determining what cryptocurrency taxation type you will need to pay, consider the following simple explanations to better understand cryptocurrency tax rules.

You pay a capital gains tax on crypto while trading your digital assets for fiat. For example, you buy BTC for $400, trade $500 of Bitcoin for US dollars, and earn $100 of capital gains. Calculating the capital gain or loss involves subtracting the cost basis from the disposal proceeds.

You also pay a capital gains tax on crypto while trading your digital assets for another cryptocurrency. For example, you buy $400 of Ethereum, and your investment increases in value to $600. You trade Ethereum for Solana to earn $200 of capital gains.

Using crypto to buy goods or services is another example of capital gains taxation. For example, you buy $700 of Bitcoin, and your primary investment appreciates to $1000. You decide to trade your Bitcoin for a laptop, which incurs $300 of capital gains.

In what scenarios should you pay income tax on crypto? Here are several of the most common events:

• You earn crypto as a referral bonus
• You earn crypto in an airdrop
• You receive a pay check in crypto
• You earn crypto from staking or mining 
• You earn crypto interest.

Crypto tax events explained

A crypto tax event is any transaction that triggers a tax liability. This can include buying, selling, exchanging, or using cryptocurrency and receiving cryptocurrency as payment for goods or services. 

In the UK, HMRC considers cryptocurrency a type of property and, therefore, subject to capital gains tax. However, the tax treatment of cryptocurrency can vary depending on the circumstances of the transaction. For example, using cryptocurrency to pay for goods or services is considered a taxable event. Still, it is not if you receive cryptocurrency as payment for goods or services.

Crypto tax guidelines for 2024

Simply put, you are only taxed on cryptocurrency when you sell it, either for cash or a different crypto-up asset. For example, if you invested in a digital asset that cost $100 and now has a value of $200, you aren't taxed for as long as you hold it. 

Two factors determine the crypto taxation amount: 

• How long have you owned the crypto? By selling your digital assets after over a year, you pay less taxes than if you sold them sooner. 
• What is your annual income? Your crypto taxes rate is higher for higher income. 

According to the latest crypto tax guidelines released by the US Department of the Treasury and IRS cryptocurrency in late June 2024, mandatory yearly crypto tax reporting will phase starting in 2026 and cover gross sales from 2025. However, crypto investors are advised to assign original purchase prices for each crypto wallet before 2025. 

According to the updated crypto tax guidelines, starting from 2026, digital currency brokers will be required to cover gross proceeds from sales in 2025 via Form 1099-DA. In 2027, crypto brokers must include the purchase price for certain digital assets for 2026. 

According to the IRS cryptocurrency regulation, crypto investors have until 1 January 2025 to establish a "reasonable allocation." By the end of 2024, taxpayers should assign a basis for each digital currency wallet. According to the explanation shared by Matt Metras, a Rochester, New York-based enrolled agent and owner of MDM Financial Services, you currently have different basis lots for digital currency bought over several years across different digital wallets. 

2024 is the most important tax year season for crypto reporting. Collect your crypto data and properly report on your activity. Starting in 2025, the IRS will have more ground to verify whether your past reporting was accurate. 

Taxable crypto transactions

Here's a breakdown of common crypto transactions and their tax implications, focusing on IRS cryptocurrency rules.

• Crypto capital losses can reduce taxable income, offsetting capital gains from other investments and up to $3,000 of regular income for single filers or those married filing jointly ($1,500 for separate filers). Losses exceeding these limits can be carried forward to future tax years.
• Lost or stolen crypto. The IRS doesn't allow deductions for crypto lost or stolen unless tied to a federally declared disaster. In 2018, the IRS clarified that theft losses aren't deductible unless reported on Form 4684 (Casualties and Thefts).
• Bankruptcy losses. The original purchase cost can offset your taxable gains if crypto becomes worthless due to a third party's bankruptcy. Losses can offset up to $3,000 of regular income, with any surplus carried forward.
• Income from crypto earned through mining, staking, or as payment for goods/services is taxed as income at rates ranging from 10-37%.
• Crypto sales and trading trigger capital gains taxes for fiat currency or another cryptocurrency. Short-term gains are taxed as ordinary income, while long-term gains are taxed at 0-20%, depending on income levels.
• Stablecoin transactions. Though stablecoin price fluctuations are minor, any trading involving stablecoins must still be reported, similar to fiat currency transactions.
• Transferring crypto between wallets is not taxable as long as the cryptocurrency isn't exchanged or converted during the transfer.
• Depending on capital gains rules, joining or exiting a DeFi liquidity pool may result in taxable events. If reward tokens are claimed, they are taxed as income.
• Airdrops and hard forks are both considered taxable income based on the cryptocurrency's fair market value at receipt.
• Receiving crypto as a gift is taxable once sold. Donating crypto to a 501(c)(3) allows for a tax-free charitable deduction.
• Crypto mining and staking rewards are taxed as income, and selling mined coins incurs capital gains tax. Staking rewards are taxed similarly—first as income and later as capital gains upon disposal.
• NFT sales are taxed as property transactions, with some NFTs treated as collectables and taxed at a higher rate of up to 28%. Gains must be reported based on the holding period.

Crypto tax-free countries

In 2024, crypto investors seeking to minimize their tax burden can explore a range of tax-friendly countries. While most countries impose capital gains or income taxes on cryptocurrency transactions, a few still tax crypto lightly or not at all. Here's a look at some of the best options:

• Germany doesn't offer complete tax exemption, but any gains are tax-free if you hold your crypto for more than a year. However, income from crypto mining, staking, or payments received in crypto are subject to taxes.
• Belarus has taken a unique approach by legalizing all crypto activities and exempting individuals and businesses from crypto taxes until 2025. This includes mining and day trading.
• El Salvador, the first country to adopt Bitcoin as legal tender, exempts foreign investors from paying capital gains tax on Bitcoin profits, making it a favourable destination for crypto holders.
• Portugal allows tax-free crypto gains for assets over a year, although crypto held for less than a year is now subject to a 28% tax.
• Singapore remains a crypto tax haven, with no capital gains tax on crypto sales or trades. However, businesses accepting crypto as payment are subject to income tax.
• While tax-free for individual investors, Malaysia imposes taxes on frequent crypto traders and businesses involved in crypto.

Other notable crypto tax-free countries include Malta, the Cayman Islands, Puerto Rico, Switzerland, and Georgia, each offering unique advantages for crypto investors.

Keep records for better crypto tax reporting

Whether it concerns crypto taxation or not, keeping records of your finances is a good habit. According to the current cryptocurrency tax rules and the latest crypto tax guidelines updates, you'd better assign original purchase prices for each crypto wallet before 2025.

Crypto tax software generally calculates gains based on your combined accounts. Thus, each digital asset's basis must be specific to the wallet. We'd like to emphasize the importance of establishing a cryptocurrency basis. Unless you do it, the IRS will consider it zero, calculating a bigger profit and higher crypto tax.