Cryptocurrency Taxation in Major Economies: A 2019 Review
By Ranjan Yadav on ALTCOIN MAGAZINE
Andreas Antonopoulos reacted to a regulatory ban on Bitcoin (a popular cryptocurrency) saying,
“You cannot ban Bitcoin in your country. You can only ban your country out of Bitcoin.”
Achtung! Still, cryptocurrency transactions summon real-life tax liabilities!
The International Cryptocurrency Regulation Framework
The OECD (Organisation for Economic Co-operation and Development — an international intergovernmental body), in March 2018, expressed its willingness to summon agreement on preparing concrete frameworks for taxing cryptocurrency. A report sent by the OECD to the G20 (or Group of Twenty — the international forum for the governments and central bank governors dedicated to discuss and promote international financial stability) for the perusal of its member countries’ financial ministers and central bank regulators contained details on the intention to frame useable tools and promote cooperation in “examining tax consequences of new technologies,” — viz. cryptocurrencies and distributed ledger technology (DLT).
Following this, the G20 started focusing its attention on facilitating enhanced international cooperation on the topic of cryptocurrency regulations. In December 2018, at the occasion of the G20 Buenos Aires (Argentina) meeting, “a taxation system for cross-border electronic services,” in consonance with the Financial Action Task Force (FATF) standards was decided to be readied by 2020.
The Financial Stability Board (FSB — an international body of financial regulators that monitors the global financial system) also published and distributed a directory of cryptocurrency regulators (Crypto Assets Regulators Directory) in April 2019 — which was scheduled to be tabled (submitted) at the G20 Osaka Summit in June 2019, as reported by Crowdfund Insider.
The G20 members communicated their intentions of creating a global registry of cryptocurrency exchanges in early June 2019. Following this, the meeting of the G20 government personnel held on June 8th and 9th (2019) also addressed the “challenges surrounding digital currencies, including money laundering and customer protection.”
At the G20 Osaka Summit held in Japan on 29 June 2019, the leaders of the G20 nations issued a statement jointly on cryptocurrency assets:
“ We, the leaders of the G20, met in Osaka, Japan on 28–29 June 2019 to make united efforts to address major global economic challenges … We reaffirm our commitment to applying the recently amended FATF standards to virtual assets and related providers for anti-money laundering and countering the financing of terrorism.”
In a G20 leaders’ declaration released in July 2019, leaders endorsed the view that technological innovation in the realm of cryptocurrency is poised to deliver considerable advantages to the economy. The determination to comply with the updated Financial Action Task Force Anti-Money Laundering and Countering Terrorism financing standards for cryptocurrencies was also reaffirmed.
The majority of the nations opt to tax their crypto investors or traders under the ambit of any of these three fundamental taxation categories: income tax, company tax, capital gains tax. Income tax gets applicable to non-incorporated entities receiving cryptocurrencies as income. Company tax is notified to administer enterprise-grade operations involving large deals having massive crypto value. Capital gains tax is meant for traders having invested in crypto on paper with the conveyed objective of reaping gains. The appropriate regulatory supervision and a framework stipulating the manner in which to approach owning, investing, and the taxation of the asset class (legal status and taxation of cryptocurrency) facilitates large institutional investors to confidently consider this investment avenue.
Crypto Taxes in the United States
Being a U.S. Taxpayer will get even more interesting for those who sold, used, or converted cryptocurrency in 2019. Cryptocurrency — the foundational base of the open financial system of tomorrow — when sold, converted, paid, donated, and earned as income is required to be reported by U.S. taxpayers (investors or traders) to the U.S. Internal Revenue Service (IRS — per the Official IRS Guidance from 2014 (Notice 2014–21) and the IRS publication 544 on the capital gains and investment property). Cryptocurrency is classified as “decentralised virtual currency” by the Financial Crimes Commission of the U.S. Treasury Department. The Bank Secrecy Act provides crypto firms the obligation of reporting, registration, and record maintenance to thwart crimes.
The IRS categorises cryptocurrency as “property” — a capital asset (not a currency) –, making it taxable in its jurisdiction as capital gains. As a result, whatever is purchased via a digital currency attracts tax liabilities as a capital gain regardless of it being for a short or long-term (relying on the extent for which the asset was held). It was in 2014 that the IRS started addressing the phenomenon of cryptocurrencies — requiring you to report your holdings, gains, and losses on crypto trade.
In the case of the U.S., the IRS treats leniently those taxpayers who avoid acting in a reactionary manner and instead opt to come forward when it comes to paying taxes against their cryptocurrency transactions. The choices that you make at this stage might determine your fate of either paying interest or facing criminal penalties.
Crypto traders are mandated to report holdings, gains and losses in cryptocurrency — regardless of the fact that there might not be any gain or loss or even when the gain or loss is immaterial. It is always your liability to report all income and transactions to the IRS. Market regulators, central bankers, and federal judges might have diverse opinions on classifying cryptocurrencies — as currency or commodity — but there is a uniform agreement to tax these cryptocurrencies. Those failing to report their incomes from cryptocurrencies correctly are liable to be penalized or facing criminal prosecution. In the new guidance issued by the IRS, the emphasis is laid on fair market value (FMV) based on the transactions’ timestamp.
According to the IRS, cryptocurrency traders are obliged to disclose the following transactional details to the IRS or face tax evasion charges: exchanging cryptocurrency for fiat currency, paying for goods or services via cryptocurrency (a realisation event), exchanging cryptocurrency from one to another (cryptocurrency), receipt of mined cryptocurrencies, getting paid in crypto or via airdrop (lottery or giveaway — depending upon how the cryptocurrency is used, will be treated as gross income).
On the other hand, the following transactions are free from the IRS’ tax scrutiny: purchasing cryptocurrency with fiat money (e.g. US$), cryptocurrency donation made to a tax-exempt non-profit or charity, gifting cryptocurrency to a third party (might attract gift tax if it is a large gift), wallet transfers of cryptocurrency (still need to be accounted). The IRS requires such traders and investors to fill-out and submit Form 8949 and 1040 Schedule D (the forms required to report your capital gains and losses from investment property) when their tax filing is due. Particular identification in defining gain or loss is permitted. If that’s not the case, the rule for IRS in regard to stock transactions is the first-in, first-out (FIFO) method of accounting.
Crypto Taxes in Canada
In Canada, crypto exchanges are categorized as money service businesses (MSBs), falling under the purview of the anti-money laundering (AML) laws. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) mandates all crypto exchanges to report all suspicious transactions, maintain records, and comply with the relevant rules of the nation.
The 2013 interpretation letter issued by the Canadian Revenue Agency (CRA) considers cryptocurrencies as “commodities” per the Canadian law — which makes your crypto getting taxed as business or property income, or as a capital gain (or business loss and capital loss). In Canada, a levy of 50% capital gains tax applies to any crypto transaction initiated by the buy-and-hold category investors. As and when cryptocurrency is being employed to pay for goods and services, it falls under the scope of the federal GST / HST (Goods & Services Tax / Harmonized Sales Tax) in Canada — potentially requiring the vendor to collect and remit GST/HST.
The full amount of business or property income is taxable, while only one-half of a capital gain is taxable. On the flip side, while only one-half of capital losses are deductible, one may fully deduct losses associated with business or investment activity. In Canada, while the entire amount of business or property income is taxable, when it comes to capital gain, only one-half of it is taxable. On the reverse side, where just one-half of capital losses are deductible, it is possible to entirely deduct losses associated with business or investment activity.
The term cryptocurrency essentially relates to a digital asset that uses encryption techniques to regulate the generation of additional units and verify transactions on a blockchain. Cryptocurrency commonly operates independently of a central bank, central authority, or government. The creation, trade, and use of cryptocurrency are evolving at an alarming rate. Those investors or traders involved in acquiring or disposing of cryptocurrency should keep abreast of the tax consequences (records in relation to cryptocurrency transactions should be maintained).
Crypto Taxes in Australia
Australia taxes cryptocurrency considering the usage to which it is put and the manner of obtaining the cryptocurrency. The government has distinctively categorized the type of crypto use that will be taxed and the type that will not be taxed. The Australian Tax Office’s (ATO) webpage on the taxes of cryptocurrencies in Australia states that cryptocurrency acquired and used for personal use will not be taxed.
So as to be termed to have been used for personal reasons, the crypto shouldn’t have been utilized as an investment (in a profit-oriented scheme) or in the course of undertaking a business activity. Whether or not the cryptocurrency you are holding is held as an investment will determine its taxability — in case if you are, you will have to pay capital gains tax on any profits upon selling the cryptocurrency. If cryptocurrency is used to pay for goods and services meant for personal use, and when the transaction value is below $10,000 AUD, they are exempt from the ambit of tax laws.
Mining of cryptocurrency such as Bitcoin and exchanges made for commercial use in Australia are termed to be exchange trading against which appropriate taxes are to be paid. Traders of cryptocurrency who use it for supporting their living are taxed for sure. The cryptocurrency operations are treated as barter agreements.
Crypto Taxes in India
While in April 2018 the Reserve Bank of India (RBI) essentially curtailed the cryptocurrency industry in India as it compelled (banned w.e.f. July 2018) all banks (regulated entities) to stop doing business with the cryptocurrency exchanges — the laws then got changed. However, a bill titled, “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019,” that is in the works, could pave the way to send those in jail for 10 years who sell or deal in cryptocurrencies — the draft proposal includes a 10-year prison sentence for those individuals who “mine, generate, hold, sell, transfer, dispose, issue or deal in cryptocurrencies.” The bill also makes the holding of crypto an offense that is non-bailable.
The buying or selling of cryptocurrency in India is considered a service. Determination of the cryptocurrency value in India can be done on the basis of the transaction value in rupees or the equal in any easily convertible foreign currency. In case the buyers and sellers are physically located in India, the transaction will be treated as software delivery. Transactions initiated beyond the territory of India will fall under the purview of the integrated GST (good and services tax) — treated as imports or exports of goods.
Crypto Taxes in Japan
In Japan, cryptocurrency is recognized as a legal tender attracting purchase tax. Japan’s financial regulator considers cryptos as “commodities”. In July 2017, the government eliminated the 8% consumption tax that was earlier levied on cryptos. Japanese citizens do pay income tax, company tax, and capital gains tax on crypto transactions. Per the reporting by Jiji.com (a Japanese news portal), as of December 2018, companies not having a presence (e.g., a factory) in Japan, were immune from local taxation. In May 2019, the House of Representatives, Japan, amended the Payment Services Act (PSA) and the Financial Instruments and Exchange Act (FIEA).
The PSA introduced amendments to the term “virtual currency,” by replacing it with “crypto assets,” for enhanced clarity; enhanced restrictions on custodian services; altered the manner in which exchanges store crypto; and kept “anonymous cryptocurrencies” under the radar of the FSA.
The FIEA introduced what is referred to as Electronically Recorded Transferable Rights (ERTRs), establishing the regulation of Initial Coin Offerings (ICOs) and Security Token Offerings (STOs) under the auspices of the FIEA; established that the Crypto Asset Derivatives Transactions will also be regulated under the realms of the FIEA — starting from April 2020; and prohibited the spread of rumors and fraudulent means in sale or purchase of cryptocurrencies.
Crypto Taxes in Switzerland
In Switzerland, cryptocurrency operations are still free from tax. However, the government is planning to exercise control on the crypto operations — due to which the following regulations are expected to be introduced: Cryptocurrencies will be treated as “valuable property,” making the disclosure of their possession mandatory in the tax return, with their value to be appropriately taxed. In case the crypto assets qualify as “private property” — i.e., not being used for business purposes, then, in unity with the present tax legislation, simply the profit emanating from the elevating price is taxed. Mining of crypto assets is either corporate (profit) tax for legal entities or income tax for individuals.
As transactions in cryptocurrencies get common on blockchains, world governments are questing new avenues to collect taxes. The transition is alarmingly expedited. With the cryptocurrency market capitalization plummeting substantially, new crypto projects are on the verge of emergence. Notably, CryotoCoinNews reported in December 2018 that the ICO market witnessed a drastic 22,000% growth since 2016 — precisely the reason why G20 leaders are queuing for a Financial Action Task Force (FATF) to standardize taxation for international electronic services.
The presence of regulatory interest of global nature is a boon for cryptocurrency stakeholders as this will inculcate the much-needed certainty (regulatory frameworks of enabling nature) that would motivate business operations of substantial scale stemming from mainstream blockchain transactions. The tax principles acting as a keystone to the global financial system have transitioned from dullness and inaptness to intelligibility and unity; wherein countries now have a model of coordinated efficiency in taxation — checking corruption and preventing money laundering.
Essentially, however, the crypto community still seeks clarity on the tax laws’ applicability, enforcement procedures and the purpose (direction) to which the global tax collections pertain — future (international) tax regimes aiming to solve these concerns should deliver borderless, transparent, and decentralized solutions. The formation of J5 (Joint Chiefs of Global Tax Enforcement) to combat transnational tax crime (meant to thwart the menace of cryptocurrency tax crime) by the United States Internal Revenue Service in collaboration with tax authorities from Australia, Canada, the Netherlands and the United Kingdom, is a welcome move to instill clarity and certainty in dealing with levying transparent taxation on international cryptocurrency dealings.
Ranjan Yadav, B.A. Economics; M.A. Public Administration, is a Writer, Editor, & Researcher for 10+ years.