More and more countries around the world are choosing to introduce cryptocurrency as a financial instrument. This option is mainly implemented by the largest economies in the world. It is also connected with the whole tax system. How does it look in practice? It is worth looking into this issue.
How did it start?
Virtual currencies have been becoming more and more popular over the last few years. That is why they attract the attention of tax institutions of many best economies. After the trade and price boom, profits from all covert activities start to be included in the tax systems. This mainly concerns highly developed countries. Therefore, cryptocurrency taxes are a very important part of the systems in different countries.
Taxation of virtual currencies accelerated after 2014, when Bitcoin and other cryptocurrencies became more popular. With the arrival of significant profits in 2017, the tax authorities of some countries have prepared for new regulations covering crypto.
Legal status of cryptocurrency
Virtual currencies based on any technology are a kind of property. The nature of digital assets is relative and depends on several factors. Regulations around the world are different. So far, many countries have not yet regulated the crypto itself and the associated tax system.
“48% of 5,750 crypto users polled strongly agreed that cryptocurrencies should be taxed, describing digital asset taxes as a must. 18% of participants expressed support for crypto taxes, however, on the proviso they were set “at an acceptable level.” Where do you stand?
— Clinton Donnelly (@CryptoTaxFixer) May 4, 2020
In general, storing digital currencies in a portfolio is often not a reportable situation in most tax jurisdictions. The most important is the concept of the profit made by selling the digital currency. This is due to the variability of crypto and it happens that coins are not sold for profit. Taxation and legalisation of crypto is a very complex issue as each state has its own set of rules. Therefore, it is worth looking at individual states and their solutions.
Crypto Taxes in USA
The IRS treats Bitcoin as property, not FIAT currency. So, all transactions using BTC will be taxed according to the rules applied in the property tax system. This allows you to write off losses. If an investor has lost his capital on surreptitious transactions during a tax year, the investor has the right to record such an event to reduce his capital gains for that year. Additionally, it is possible to offset this year’s losses against future profits, as long as the investor declares his losses in a given year. Any trading operation using Bitcoin should be reported to the IRS. US taxpayers who sell products and services in exchange for Bitcoin are required to include the value of the Bitcoin received in their tax returns.
There is a large distinction in the US between surreptitiously, which is treated as an investment, and digital assets received in return for extraction or remuneration for an independent project. In the latter case, the crypto forms part of the income and must be declared as part of the taxable profit. In the latter case, the appropriate market value of the digital asset on the date on which it is booked in the investor’s account must be used and an appropriate amount added to the taxable profit. If the cryptocurrencies asset is sold at a later date, capital gains tax must be paid on its disposal.
The calculation of the capital gains on the proceeds of the sale can be done by deducting the cost base of the crypto sold. The IRS explains that in order to find the cost base, a specific identification or FIFO must be used. The identification allows you to select the digital currency sold, but requires more accounting activities. Therefore, an easier way is to use FIFO, where the virtual currency that was bought first is also sold first.
In the case of a virtual currency sale, a short-term tax on capital gains must be paid within one year of purchase, which is subject to income tax rates. If an investor sells a virtual asset after a year, he will pay long-term capital gains tax, which is 0%, 15% or 20% depending on his reporting status and income.
The value of BTC is calculated at the Bitcoin price in USD, on the date a taxpayer receives the virtual currency. The process of crypto mining in the US is also subject to taxation. Once the cryptocurrencies is extracted, the miner must include its corresponding market value to its annual gross income.
Taxpayers who do not comply with the tax laws on digital assets may be liable to penalties. Therefore, it is very important to control all BTC transactions in order to comply with US tax regulations.
Crypto Taxes in Canada
The Canadian Tax Agency treats crypto goods as tax goods. This means that any income that an investor receives from digital asset transactions is treated either as business profit or as capital income. This mainly depends on the nature of the business. If you incur losses, they are considered as business or capital losses for tax purposes.
In Canada, these two forms of income are taxed differently. 100% of business profits are taxed. On the other hand, only 50% of the income from capital gains is taxed.
The Canadian Tax Agency states that having a crypto disposable income has tax consequences. These events include exchange for FIAT, covert trading, use of digital assets to purchase goods and services and purchase of virtual assets.
If an investor treats his cryptocurrencies as a capital gain or loss, he should record this in his capital gains according to Schedule 3. Otherwise, if someone reports his gain or loss from owning digital assets as business income, he can report it through T2125, a statement of business or professional activity.
If you are a crypto-miner in Canada and are treated as a hobby or business activity, in this case, you are advised to consult your tax advisor who will determine how to proceed.
Crypto Taxes in United Kingdom
In the UK, HMRC first explained the crypto taxation in 2014, and the state has recently updated its guidelines. Her Majesty Revenue & Customs recognises Bitcoin and other digital currencies as “cryptographic assets”. Therefore they are not treated in the same way as FIAT currencies. The second important aspect is that not all virtual currencies have the same properties and the tax treatment is different.
The tax system focuses on three types of virtual assets: utility tokens, security tokens and exchange tokens. However, taxation currently only covers exchange tokens, which are the most popular coins – BTC, ETH, XRP, LTC etc. Additionally, tax processes are not based on the type of crypto, but on the way it is used.
According to HMRC, capital gains taxes only have to be paid when digital assets are sold. This applies to the exchange of cryptocurrencies into FIAT currencies and virtual assets into other crypto. It also includes sending virtual money to other people with whom the transferor is not connected in any way. You don’t have to pay tax when you are giving cryptocurrencies to family members. If a person makes a donation of digital assets to charity, then there is no tax either.
Companies whose purpose is to trade digital assets are required to pay taxes based on their profits. This applies to crypto exchanges and trading platforms operating in the UK. Taxes are also levied for crypto mining and staking.
In the UK two factors determine the amount of tax. This is the marginal tax rate and income tax bracket. There is also an exemption limit of £12,000, whether on earnings or profits from crypto sales. Therefore digital asset transactions with capital gains of less than £12,500 do not require payment of tax. However, if an investor speculates on the price of a digital asset through a CFD, other taxation methods may apply.
Crypto Taxes in Germany
Unlike most developed countries, Germany does not see virtual assets as currencies, commodities or stocks. Bitcoins and altcoins in this country are considered private money. This is a very important distinction since private sales in Germany bring tax relief.
Why pay taxes when you can just convert crypto to gift cards. pic.twitter.com/xJRAQNWEOI
— Bull Run Jesus (@BullRunJesus) June 5, 2020
Under rule 23 of the EStG, private sales that do not exceed EUR 600 are exempt from tax. However, it is more interesting to note that a citizen does not pay tax if he owns a BTC, ETH, XRP or other crypto for more than one year.
No matter how much you earn from selling your crypto, you do not pay tax on capital gains if you have them for more than a year. So when an investor on January 1, 2017 bought 1 BTC for $1,000 and then sold it on December 15 for $17,000, he would have to pay capital gains tax. However, if a BTC owner sold it after January 1st, all capital gains taxes would be waived.
Crypto Taxes in Japan
One of the most important issues in Japanese crypto taxation was the consumption tax. Under the tax law in Japan, the sale of cryptocurrencies is subject to a consumption tax if the transferor is located in Japan. However, in 2017, the tax laws were amended.
Due to these changes, if crypto sold can be considered a virtual asset under the Payment Services Act, no consumption tax will be imposed. The Japanese state tax agency also announced that profits realized from the sale or use of virtual currency will be treated as “miscellaneous income” if the taxpayer is unable to make a start to offset the profit realized from the crypto sale or use of the virtual currency.
Crypto Taxes in Poland
In Poland, crypto possession, trade and use as a form of payment are also subject to taxation. Several years ago it was a more complicated process. However, there is now a new law in force on the payment of taxes on digital assets, which was introduced last year.
So if in 2019 the investor bought, sold or exchanged his virtual currencies for some goods, he can settle these actions in PIT 38. It is worth noting that the exchange of one crypto into another is tax-free. So when someone wants to buy a BTC for ETH, they do not settle it in their tax return. On the other hand, the exchange of crypto into FIAT currency is already taxable. The tax on income from digital assets alone is 19%.
What about crypto miners? If in 2019 they sold their mined assets and want to include expenses for equipment or energy in the costs, they can do so by applying for an individual tax interpretation. If the application is rejected, it is possible to take the case to court.
In Poland, the tax on virtual assets is calculated separately, so it should not be combined with income from business activities or other investments. Additionally, digital currencies are not subject to exit tax. So if an investor emigrates from Poland for at least a year, he can change his tax residence to a foreign one and sell his cryptocurrencies and then settle down according to the law in force in the country.
Crypto Taxes in India
India is a country that does not consider crypto as a legal tender. Interestingly, the government did not consider it completely illegal either. India is one of the largest economies in the world. However, its government treats assets that can replace FIAT currencies with great uncertainty. This is because the government of this country does not know how to properly regulate this type of digital money.
The RBI has limited all banks’ ability to cooperate with crypto exchanges. Financial institutions have therefore stopped operations with digital asset platforms. Following the introduction of these regulations, the crypto exchanges abandoned their activities in India and relocated their companies to other countries.
Through these activities, digital asset companies have received notifications from tax authorities in order to explain the transactions and loss of revenue to the Government of India. Many of these declarations have not been made because there are no relevant regulations for crypto-tax settlements in India. In early March 2020, the Supreme Court issued a statement ordering the RBI to remove the restrictions that had been imposed on traders and crypto companies in India. Following this information, the RBI filed an appeal. It is also expected that the RBI may introduce regulations governing the crypto market that will restrict the use of crypto in payment systems. It is likely that only transactions involving, among other things, crypto-scrapers will be allowed, and all such transactions will be reported.
Due to the situation in India, crypto investors have doubts as to how to demonstrate their capital in their annual tax returns. This situation makes the profits made by virtual currencies a grey area for the Indian crypto community.
Crypto Taxes in Russia
Russia is a country where cryptocurrencies are very popular. However, the country has still not introduced regulations and trade is marked by a grey zone. Despite the lack of special regulations concerning taxation of crypto transactions, the Tax Code of the Russian Federation has responded to them. The Ministry of Finance in Russia expressed the view that all profits from operations on cryptocurrencies should be subject to personal income tax and issued two information letters in May and July 2018.
In these statements, the institution noted that all economic benefits resulting from transactions with digital currencies are subject to taxation, and taxpayers should pay income tax. In addition, the taxable amount of a transaction of sale and purchase of a cryptocurrency should be defined in rubles as the excess of income earned by the taxpayer from the sale of digital currencies in relation to the total amount of expenses for the purchase of the virtual money, and the taxpayer must calculate the amount of tax to be paid by submitting a tax return itself.
Russians can still work on new operations that potentially track crypto activity and ultimately tax individuals. Russian banks have offered to track transactions from crypto sales, but for the time being investors in digital assets are not controlled.
However, recent information about Russia’s position regarding the regulation of crypto is shocking. On March 16, 2020, one of the representatives of the Bank of Russia – Alexei Guznev – provided information about the planned introduction of a ban on the issue and restriction of virtual currency circulation. The draft law on digital money emphasizes that the extraction of BTC carries a huge risk. Therefore, the new law may prohibit the issue of virtual assets in Russia. Experts are critical of the Russian Bank’s position, because such an approach may cause and limit the country’s economic and technological development.
Crypto regulation is constantly changing, and depending on the ability to supervise bank accounts, tax institutions may be more consistent in seeking income from a crypto exchange. It is important to remember to keep detailed records of all activities that relate to digital assets. This will help to make it easier to settle taxes that include virtual assets.