BIP39 is awesome

There’s a saying the UK’s Inland Revenue have come up with as part of their public outreach: ‘Tax doesn’t have to be taxing’. That’s just plain wrong, especially when it comes to crypto. But tax is one of life’s inevitabilities, and it helps a lot to know your adversary.

First up, a warning: Don’t try to dodge paying tax on bitcoin/crypto earnings, because they’re coming for you. You might have been able to get away with it until now, but just like everyone else, the tax authorities are now well aware that a lot of money is being made (and lost) with crypto, and they want their cut. Since everything is recorded on the blockchain, it’s only a matter of time before they start digging around and coming calling if they think you owe them. Best not take any chances.

Secondly, your tax obligations vary massively depending on your jurisdiction and personal circumstances, so this is necessarily an overview. There are at least four kinds of tax you may need to know about, and may want to for your own benefit:

Income tax. Any money you’re paid as normal earnings. In most (but not all) jurisdictions, that includes crypto. The rate will generally be the price of the crypto at the time of the transaction.
Capital gains. This is the difference between the price when you buy and the price when you sell. Capital gains is often lower than income tax, and it’s only chargeable when you sell. Consequently it can make sense to structure your ‘earnings’ to become capital gains, if possible. How you do that again depends on circumstances and jurisdiction. In some places, it’s simply a matter of how long you hold your crypto – after a certain period of time, you move into the capital gains bracket.
VAT (Value Added Tax). There are a few jurisdictions where crypto transactions are subject to VAT, which can be a real killer. Fortunately, most regulators understand that it’s a bad idea to slap an extra 20% or so onto every regular purchase or transaction.
Corporation tax. This applies if you have your own company. Whilst it may complicate matters for you, it can be worth incorporating yourself if your earnings or gains are above a certain point, because corporation tax is often much lower than income tax (again, this is jurisdiction-dependent).
If in doubt, seek advice from a tax professional. It may be one of the best investments you ever make.

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