As a new asset class, you know you are doing something right when the taxman shows up and wants to collect their share of your hard-earned cryptocurrency profits. Prior to 2017 taxation and cryptocurrency capital gains (and losses) do not appear to be on very many governments radar. As of 2020 we have some notable developments surrounding taxation of cryptocurrency. A summary of a few countries is given below:
Cryptocurrencies are not considered to be an official form of currency, however, earnings are subject to tax law.
Cryptocurrency is taxed like other investments in Canada, where 50% of the gains are taxable and added to the declared income for that year. For example, if you bought a cryptocurrency for $1,000 and sold it later for $3,000. You would have to report a capital gain of $1,000 (50% of $2,000) which would be added to your income and taxed at your marginal tax rate. Note that the scenario applies to normal buy and hold investors. High volume traders e.g. those who hold cryptocurrencies for a short period of time or day trades them, are considered as businesses by the Canadian Revenue Agency who will require taxation of the gains.
China has yet to take a policy and regulatory stance on cryptocurrency taxation, the government has been largely silent on the matter. Assuming cryptocurrency would be recognized as property or a commodity in China, it would be subject to personal income tax. In China, personal income tax is divided into 11 categories, each with its own rate and allowable deductions. Cryptocurency could be taxed under 2 categories either as “Incidental income” or “Other taxable income”. However, trading cryptocurrency and selling for profit (or loss) remains illegal in China so taxation of illegal activity is unlikely to be reported.
European Union Member States
European Union Member States are taking different approaches for crypto taxation. EU cryptocurrency taxation ranges from 0-50%, In Denmark individual investors trading cryptocurrency aren’t subject to any taxes. While Belgium doesn’t have any official guidance on crypto-taxation (profits from trading), if declared, is reportedly taxed at 33%. In Slovenia individuals and businesses can be taxed at 50% for amounts higher than 70,000 Euro.
As a Member State Germany, like other EU countries, applies its own country-specific regulations in the absence of EU guidance. In July 2013 the German Ministry of Finance (MoF) declared bitcoin as an “independent commodity”. That results in bitcoins being treated by tax norms called: “private sale transactions” following section 23 German Income Tax Act (“ITA”). The MoF statement covers bitcoin only, it was not clear for investors how to declare taxes of other cryptocurrencies.
The Japanese government treats cryptocurrencies as a form of miscellaneous income with tax brackets as high as 55 percent (compared to just 20 percent for trading equity). In mid-2019 the Japanese government declared it would take action against cryptocurrency traders. The government estimated collectively that cryptocurrency traders and holders had not declared cryptocurrency income worth over 10 billion yen ($90.7 million USD).
In early January 2020, Russian Prime Minister Mikhail Mishustin went on record saying he is looking to implement crypto taxes in Russia.
In South Korea, the Ministry of Economy and Finance's income tax office had been reviewing a new proposal that could see the country adopt a clearer regime for how it taxes cryptocurrencies. Government regulators are considering classifying cryptocurrency portfolios as “other income”.
In the U.K., cryptocurrencies like bitcoin are deemed to be commodities and holders can be liable to pay and report a 20 percent tax on disposals that exceed £12,000 (~$15,600 USD) in the same tax year.
In mid-2019 the U.S. Internal Revenue Service (IRS) sent out letters to taxpayers asking individuals to voluntarily declare their cryptocurrency gains. The IRS tracked taxpayers who conducted cryptocurrency transactions and sent “friendly” reminders to pay their cryptocurrency taxes. These so-called “soft notices,” began circulating since June 2019 to individuals who may have neglected to report (or underreported) their cryptocurrency gains on their recent taxes. The IRS has sent at least 10,000 soft notices to taxpayers for 2019.
The IRS also issued guidance in October 2019 that re-iterates their view that they consider cryptocurrencies as a form of property, even when received as a form of income. Depending on a person's income bracket in the U.S. the taxes liable can exceed 39 percent if the cryptocurrency is held for less than a year.
The latest development in the U.S. (as of mid-January 2020) is the introduction to Congress of the Virtual Currency Tax Fairness Act of 2020. The bill has the potential to resolve the issue of bitcoin and other crypto payments by implementing an exception for the potential capital gains taxes that often occur when these digital assets are used in everyday commerce.
Holding cryptocurrencies and trading is forbidden in several countries, thus no taxation of cryptocurrencies occurs. Countries prohibiting cryptocurrencies include:
Cryptocurrency taxation is still a very new for most governments who haven’t established policy in this area yet. Cryptocurrency presents challenges for taxation regulatory oversight. Should every individual cryptocurrency transaction be considered as a taxable event? Perhaps there could be a rate aggregated tax over the entire year? Would there be flat taxes charged for converting into other cryptocurrencies or moving cryptocurrency to fiat?
As a digital asset cryptocurrencies with units, trading, exchanges and price discovery closely mirror stock market offerings. The approach taken by the governments in many developed economies has been to treat returns made on cryptocurrencies as a form of capital gains – a tax that is levied on the difference when a sale price exceeds that of the purchase price.
The implementation of taxation regulations for cryptos is good in some respects as it brings legitimacy to mainstream cryptocurrency investors. Businesses will begin to adopt cryptocurrencies and begin accepting digital assets like bitcoin and ethereum as valid methods of payment if business taxation laws are clear and straight forward.
New taxation regulations of crypto capital gains is just another indicator of the entire sector being noticed, taken seriously, and adapted for use by mainstream infrastructure.