What Happens if I Don’t Pay Tax on Crypto? Spoiler: It’s Bad

What Can Happen If You Don’t Pay Crypto Taxes?

It’s a good idea to pay your crypto taxes for the obvious legal repercussions that could result if you don’t. By not paying you crypto taxes you open yourself up to things such as fines, interest on money owed, and in the worst case, jail time. However, what is considered a taxable event with cryptocurrency varies from country to country, as do the amounts of tax which are levied on said events. For all of the countries, capital gains taxes are only paid on the profit made by you, not the total amount.

Below we’ve outlined some of the most common taxable crypto transactions for the US, Canada, and UK, along with whether they’re capital gains or income. Please take this guide merely as a starting point and not actual tax advice.

USA

The US, as you might expect if you live outside it, has less tax on crypto than the other two countries in this guide. They also have less taxable events for capital gains on crypto than the UK or Canada.

In the US, capital gains are only paid when selling crypto for fiat currency, trading a crypto asset for another, or spending it on goods and services. Tax rates for US capital gains start at 10% for crypto, going up to 37% depending on your household income and marital status. There are also some benefits for holding your crypto long-term. The US allows you to give up to $16,000 in crypto, per person, tax-free. This can be a good way to reduce taxes within a household by giving crypto to a spouse, though can also reduce tax overall by giving to any person/multiple people.

It’s considered income taxable in the US if you receive crypto from getting paid in it, mining, airdrops, hard forks, staking, or referrals. This is ostensibly the same across all three countries featured. Essentially, if you’re earning crypto somehow, that’s income and can be taxed as such. Day trading cryptocurrencies would also be considered income rather than capital gains.

Canada

In Canada, capital gains are paid on crypto when selling it for CAD, swapping it for other crypto assets, spending it on goods and services, or gifting it to someone. The last one is in stark contrast to the US, which allows you to give up to $17k USD (over $20k CAD) to someone without any tax. The capital gains tax starts at 15% in Canada too, compared to the 10% in the US.

The only difference between income tax on crypto when comparing Canada to the US is that the tax rate varies depending on the province you live in and your household income. You simply add your crypto income to your federal income tax report for the US. As with the US, day trading is considered an income taxable event rather than capital gains.

UK

In the UK, capital gains are paid on all the same dispositions as in Canada, except that you’re allowed to give crypto to your spouse in any amount (likely an amount that doesn’t affect their capital gains allowance) without paying tax on that transaction.

Capital gains tax starts at 10% for household incomes of up to £50,270, only increasing to 20% if you make over £150k, which is also the max rate.

The HM Revenue and Customs (HMRC) is also the only federal tax agency in this guide that has fully defined tax guidance for decentralized finance (DeFi) transactions. They’ve determined that income tax will only apply on a return you receive from an activity. This could include rewards from staking, yield farming, lending, and more. HMRC will likely consider it income if:

• The return you receive has been agreed upon
• If your return is paid by the borrower/DeFi platform
• If your return is paid periodically throughout the period of lending/staking

Tax-Free Crypto Transactions

While there are quite a few taxable crypto transactions, there are also a few types that are tax-free in the three countries in this guide. Unless specified they apply to all. They are:

• Buying Crypto with fiat
• Moving crypto between your own wallets
• Holding it after purchase
• Being gifted crypto (Canada), gifting crypto to spouse (UK), gifting crypto to anyone (US)
• Creating a DAO (Canada)
• Donating crypto to charity (US and UK)
• Creating an NFT (US)

Doing any of the above actions is tax-free assuming you’re in that jurisdiction. Gifting crypto can be a good way to reduce taxes in both the US and UK, though it’s not an option in Canada.

Closing Thoughts: Just Pay Your Taxes

Even if you’re not in the green for the year, you should certainly report your crypto on your taxes this year and every year. Not doing so can open you up to legal repercussions in the long-term, especially if there comes a point where you’re suddenly ready to reap a large profit.

While crypto taxes can be conjuring, there are plenty of options when it comes to crypto tax software such as Koinly which can help you navigate their complexity.