What is the problem with cryptocurrency? In January 2009, when Satoshi Nakamoto mined the genesis block of Bitcoin, he has written the following: “The Times. January 3, 2009: the Chancellor is on the edge of another bank bailout.”
Bitcoin is a turnkey solution for those who do not want or cannot use fiat currencies, lost faith in central banks, live in a country with a degrading economy or in a region without stable currency. Meanwhile, states around the world are launching various tax and administrative processes monitoring the circulation of cryptocurrencies, limiting and devaluing their essence as such.
After the quarantine in Russia, the number of tax inspections quadrupled.
At the moment, there is no cryptocurrency regulation in Russia, but on July 31, President Vladimir Putin signed the law “On digital financial assets”, which will enter into force on January 1, 2021. Therefore, the taxation regime for income from operations with cryptocurrencies remains the same, explained Dmitry Kirillov, senior tax practice lawyer Bryan Cave Leighton Paisner (Russia) LLP, Moscow Digital School instructor. If by the beginning of next year the tax legislation does not change, income from transactions with cryptocurrencies will be taxed in the general manner: income from sale except acquisition costs, the difference is taxed at a rate of 13% for residents (15% from next year if income exceeds 5 mln. rubles. The amount exceeding this threshold will be taxed at an increased rate). The expert added that this taxation procedure has been repeatedly explained by the Russian Ministry of Finance.
Antonina Levashenko, a member of the Commission on the Legal Support of the Digital Economy of the Moscow Branch of the Russian Lawyers Association, Head of the Russian Center for Competence and Analysis of OECD Standards at the RANEPA under the President of the Russian Federation, stressed that it is necessary to pay taxes on transactions with cryptocurrency in Russia. However, this process is still uncertain. “If in the tax authorities of the OECD countries were among the first ones (along with the financial intelligence units) to give detailed explanations about the consequences awaiting those who exchange cryptocurrencies for fiat currency, purchase goods or services for virtual currencies, receive a salary in bitcoins, etc. Even the adoption of the law on the CFA did not eliminate the uncertainty regarding the tax consequences of the use of cryptocurrencies in Russia. Now after passing the law on CFA, the community has to wait for the competent authorities’ more detailed position on tax issues. Although this could have been done before the adoption of the law, and much earlier, ” mentioned Levashenko.
The Law “On Digital Financial Assets” provides the definition for Bitcoin and other cryptocurrencies, and prohibits its use as a means of payment in the country. According to the document, Russia provides the possibility to buy, sell and perform other transactions with cryptocurrency on a legal basis. Moreover the law contains a reference to separate documents that will regulate mining, the organization of the digital currency’s issue and circulation.
Crypto whales: US and others
As for the cryptocurrencies main market – the US it is a country with a complex tax system. The state is actively regulating cryptocurrencies, while the crypto community is trying to check all the details a new tax practice.
The Internal Revenue Service (IRS) is responsible for Tax administration in this country. The IRS defines cryptocurrency as a property, not a currency, and applies appropriate taxation to transactions with it. Investors and traders are required to report on all cryptocurrency transactions, regardless of whether they were profitable or unprofitable. In the United States, regulated sites work with the IRS to share information about their customers. The declaration must include the dollar equivalent of each transaction. The list of cases to report is extensive and depending on the situation different taxes may apply. For example, if a user makes a profit from mining, receives a reward for rendered services or sold goods, or even participates in an airdrop, then such cases are considered as income, respectively, income tax is applied to them (10-37% depending on the amount of earnings). If an investor sells coins for fiat or converts them into another cryptocurrency, or spends them on goods and services, in such cases, the capital income tax is applied (up to 20% for investments with a period of exceeding 1 year). For higher incomes, a tax on net investment income (about 4%) might be levied as well.
But there are also such transactions for which you do not need to pay any deductions. For example it relates to the cases of purchasing cryptocurrency for fiat and then storing it in the wallet without moving (in other words, HODL); donations; transfers of coins between your wallets. After the crypto investor has collected information about all transactions, he must calculate the total income or loss for the year. It’s not difficult if you can count transactions on your fingers, but what if it goes hundreds ones? First, American crypto exchanges provide a service for preparing such reports (for example, Coinbase). Second, the United States have a large number of tax consulting firms, including automated ones. And many of them help to understand the process of cryptocurrency transactions taxation. If an American crypto investor decides not to declare any transactions, there is a chance that the tax authorities will find out about this and apply sanctions to him. This is because the IRS can monitor data about a citizen’s taxable activities. As Forbes explains, the IRS uses a special system. It works quite simply: Coinbase, Kraken and other regulated US crypto exchanges are required to send tax return forms to all users with more than 200 transactions and $ 20,000 in turnover per year. Copies of the same declarations are sent to the tax office. If a citizen does not provide a completed declaration, then the program marks him, and the user begins to receive notifications. In addition, the tax office may request information from the exchange about the investors it is interested in. So, in the summer of 2019, following a special investigation, the IRS sent warnings about the necessity to declare transactions to 10,000 crypto traders.
Canada crypto vibes
Like its southern neighbor, the United States, Canada generally maintains a Bitcoin-friendly stance and monitors that cryptocurrency is not used for money laundering. The Canadian Tax Agency (CRA) treats Bitcoin as a commodity. This means that Bitcoin transactions are treated as barter transactions and the income generated is considered as a business income. Taxation also depends on the type of an activity the person is engaged: whether buying and selling or only investing. Canada considers Bitcoin exchanges as a money-serving organizations. This puts them under anti-money laundering (AML) laws requirements. Bitcoin exchanges need to register with the Financial Transactions and Reporting Analysis Center of Canada (FINTRAC), report any suspicious transactions, comply with compliance plans, and even keep certain records. In addition, some major Canadian banks have banned the usage of their credit or debit cards for Bitcoin transactions.
Although Great Britain has left the European Union, it remains one of the most financially developed countries in Europe. As the United States, this country has already developed quite detailed rules for the taxation of cryptocurrency transactions. Tax collection in the United Kingdom is handled by Her Majesty’s Office of Taxes and Customs (HMRC). British officials define cryptocurrencies as a valuable asset, so transactions with them are subject to capital gains tax or income tax in some cases. Individuals need to pay taxes on transactions with crypto assets according to a scheme similar to the United States (earnings in cryptocurrency and mining are subject to income tax, other types of operations are subject capital gains tax). Tax rates also depend on the amount of income, but slightly differ at the same time depending on the region (for example, in England and Scotland). Annual income below £ 12,500 is not subject to income tax. For higher earnings there is a floating rate of 20% to 45%. As for the capital gains tax, it is 10% for total investment income of less than £ 50,000 per year and 20% if this figure is higher.
Curiously, the HMRC is acting in unison with the American IRS. So, last summer, the British tax authorities conducted a similar IRS investigation of the income of its citizens trading on stock exchanges. This became known after major exchanges such as Coinbase received requests from HMRC for financial information about UK users. In addition, HMRC has allocated funds to create software for monitoring blockchains of leading cryptocurrencies. The future solution should establish the identity of users behind a particular address in the blockchain, calculate what the user spends coins on, check the connection with darknet sites and illegal services, and in the future, be able to analyze private cryptocurrencies. Note that leading blockchain analysis companies operate in the United States (Chainalysys and CipherTrace).
The European Union is also trying to develop a taxation system for the crypto industry, including the leaders of the union: France and Germany. Let’s take a closer look at the taxation of the crypto industry in these countries. Until the end of 2018 in France, cryptocurrencies were treated as private property (such as real estate or stocks), so the same capital gains tax at the standard rate of 36.2%.was applied to income from investments in them. However, at the end of 2018, the French parliament considered a number of proposals to amend tax laws aimed at introducing incentives for cryptocurrency transactions. As a result, all amendments were rejected, except for the one related to the introduction of a reduced flat scale of capital gains tax. It was 30%. At the same time, in the case of the sale of crypto-assets for fiat or receiving a salary in crypto-currencies, income tax is charged (from 14% to 45%). However, for organizations, a softer rate of 31-33% is applied, which will be reduced to 25% by 2022. In the spring of 2019, France passed a law called “PACTE”, which introduced general regulation of the crypto market and outlined the legal status for cryptocurrencies, their operators, as well as ICOs. According to the PACTE, at the end of last year, the country’s Financial Market Supervisory Commission (AMF) issued a detailed guide to licensing companies that conduct all types of cryptocurrency transactions. This has resulted at the appearance of the concept of a digital asset service provider and setting the requirements (for example, in terms of cybersecurity) that companies must meet in order to register in the register of the regulator. Separate rules have been issued for crypto custodians, exchanges and brokers. At the end of last year, AMF officially approved the first legal ICO. At the same time, token sales (except STO) now qualify as the sale of goods and services, so the issuer is obliged to pay VAT in the amount of 20%. If the token is a security, only a small registration fee is applied to it. In September last year, in an interview with Bloomberg, the Minister of Economy and Finance of France, Bruno Le Maire, said that the exchange transactions of one token for another would not be taxed at all. This will simplify the problem of tracking transactions. According to the minister, the sale of cryptocurrency for fiat should be treated as the optimal tax event. Le Maire also clarified that VAT will only be charged if the cryptocurrency is used for the purchase of goods or services.
The situation is somewhat different in Germany. Back in 2013, the Ministry of Finance recognized Bitcoin and other coins as “private money”, a special type of virtual currency, which at the same time is considered a legal unit of account in the context of income taxation. Therefore, for example, when using bitcoin to pay for services, an individual does not need to pay VAT. While, the company that provides a cryptocurrency exchange service is required to pay VAT. The tax on income is of more interest. Based on ownership type, cryptocurrencies are classified as intangible assets, so no income tax is applied to them, but under one important condition: the crypto assets should have been in possession for more than one of the year at the time of sale (both for fiat and other tokens). Therefore, hodlers can relax. For shorter periods, a progressive income tax scale is applied (from 14% to 45%, and 0% for annual income below € 9400).
What’s on Asia
In the countries of the rising sun they follow a “special” path. Or at least they are thinking about it. One such case is South Korea. Cryptocurrency trading in this country is extremely popular. In April last year, local media reported an increase in the proportion of adults and economically active citizens (aged 25 to 64) who own cryptocurrencies. In addition, the average crypto asset holding has grown to $ 6,000. While income from cryptocurrency trading in South Korea is not taxed, however, authorities are considering a tax of 20% on income, similar to the tax paid on winning the lottery.
But in Japan, where cryptocurrency trading is very popular, the taxation system against crypto traders is strict. Based on CoinDesk, income from investments in cryptocurrencies is defined as “additional income”, which is subject to an increased rate of up to 55% (while the income from investments in securities is taxed at a rate of 20%). Apparently, this is the reason the participants in the Japanese crypto market try not to declare their earnings. So, in June, the country’s tax authorities announced that crypto companies and traders had not paid about $ 93 million to the treasury. After that, officials began investigations against 30 companies and 50 users. The government also announced plans to increase the transparency of the crypto industry. In particular, it asked local exchanges for data on their clients’ transactions. In Japan the officials plan to reduce the tax burden on the cryptosphere. A corresponding law was introduced to the country’s parliament at the end of 2018. Last year the industry association asked to reduce taxes on cryptocurrency transactions of the financial regulator (FSA). However, the response of the officials is unknown.
As of February 2020, Bitcoin has been legal in the US, Japan, UK, Canada and most other developed countries. In the developing markets, the legal status of Bitcoins continues to vary greatly. China has severely restricted Bitcoin without actually criminalizing its storage. India has banned banks from trading Bitcoin and left the overall legal status of cryptocurrencies unclear. In general, it is necessary to study the Bitcoin laws in specific countries. Even if Bitcoin is legal, most of the laws that apply to other assets apply to BTC as well. Tax law is an area where most people can run into problems, so in general BTC is treated as property, not currency.
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