Investing in cryptocurrency is an uncertain proposition in 2020. Not only is there market uncertainty from the pandemic shutdown and reopening, but also each country taxes crypto investments differently. Certain countries have enacted robust guidelines and laws governing cryptocurrency transactions, while others have only just begun considering how to tax cryptocurrencies. So the after-tax benefits of investment will look very different if you lived in Germany, for example, rather than the UK. We will take a global overview at these efforts, and then focus on the tax rules in the United States.
Taxation of cryptocurrency investments are generally more clear in the European region because of well-developed tax guidance. For instance, the Netherlands, Italy, Sweden, and Belgium all have guidelines on cryptocurrencies – with taxable and non-taxable disclosures on basic crypto transactions. France and the UK, who already have a grip on crypto taxation, will broaden their scope to include more taxable events to crypto activities.
On the other side of the spectrum, Germany, Belarus, Portugal, Malta, Switzerland, and Slovenia all have exempted crypto from certain tax brackets, including VAT and personal income taxes, depending on the jurisdiction.
Some countries in Europe have yet to define cryptocurrencies or what they consider taxable or non-taxable crypto events.
Asia & Middle East
Generally, Asian and Middle East countries have not issued guidelines on taxation of cryptocurrency. For example, in 2019 India started sending detailed notices to investors asking probing questions about crypto investments, but the government has not yet provided any concrete rules. Some countries, such as, South Korea, China, and Thailand, are apparently discussing internally how to tax crypto transactions.
A notable exception to this general rule is Singapore, which proposed rules in 2019 to remove goods and services tax (GST) from crypto transactions that serve as a medium of exchange. Malaysia also seems to be following their lead. Similarly, United Arab Emirates are looking to exempt taxes on crypto.
By default, cryptocurrencies aren’t taxed in Africa. This isn’t just attributed to the difficulty of tracking crypto transactions or the new nature of cryptocurrency as an asset or financial instrument. In many African countries, their tax rules are not developed enough to impose tax on virtual transactions, making it difficult for sole proprietors and small businesses to pay tax, and making tax evasion relatively easier. While a few countries such as Nigeria, South Africa, Zimbabwe, Ghana, and Uganda have shown some interest in this field, however, there is no sign of taxation or regulations of crypto activities on the continent anytime soon.
Cryptocurrency regulations run the legislative spectrum in Latin America. Among those countries with harsher regulations — Bolivia, for example — has comprehensively banned cryptocurrencies and exchanges, while Ecuador has issued a ban on the circulation of all cryptocurrencies apart from the government-issued “SDE” token. By contrast, in Mexico, Argentina, Brazil, Venezuela and Chile, cryptocurrencies are commonly accepted as payment by retail outlets and merchants.
For tax purposes, cryptocurrencies are often treated as assets: they are broadly subject to capital gains tax across the region, while transactions in Brazil and Argentina are also subject to income tax in some contexts.In various countries in the region, there are different interpretations and concepts regarding what type of good or asset is considered to be a cryptocurrency. Chile, for example, considers any crypto as “a digital or virtual asset,” Colombia as an “immaterial good,” Peru as a “movable asset,” while in Argentina, there is no official definition at the moment.
However, there are still many doubts concerning when taxes should be paid for owning cryptos or trading them. For Chile and Colombia, a concept called “alienate” is used, which basically means selling. The term is generally understood as being when the person no longer owns the crypto, whether they have sold, swapped, or carried out any other business with it. Therefore, for both countries, people must pay taxes when they sell crypto. Due to the lack of official definition by the Argentine government towards crypto, there are also no guidelines on when Argentines can pay taxes on crypto. In the countries mentioned, local or foreign crypto exchanges are not the ones in charge of taxing on behalf of the client, since it is the responsibility of each taxpayer to declare their obligations to the local authorities.
The United States
Compliance push for individuals, small businesses, and exchanges
2019 was a major year in crypto taxation in the US. First, the IRS sent out notices, such as Letters 6174/6174-A and Notices CP2000 and CP2501, to certain cryptocurrency traders who either misreported or under-reported their gains or losses. These were targeted at individuals who were dealing with cryptocurrency. The IRS also issued a ruling (Revenue Ruling 2019-24) and FAQs on its website examining how different cryptocurrency transactions should be taxed, and providing various definitions. Finally, the IRS added a new question to the individual income tax return (Form 1040) that asks if the taxpayer engaged in any virtual currency transaction that needs to be reported. Falsely answering this question could lead to fines and penalties.
In 2020, the IRS may focus on businesses and other services accepting crypto. This will definitely increase the necessity for bookkeeping platforms who can understand crypto transactions and integrate with popular tax software seamlessly. With the lack of such platforms, it is very important for businesses to keep proper records in USD and cryptocurrency along with wallet/account addresses properly.
Apart from individuals and businesses accepting crypto, the other major focus could be the exchanges themselves. Exchanges are those entities or venues that provide a marketplace for customers to conveniently buy and sell various cryptocurrencies with other customers, similar to a stock exchange. While these exchanges may already have to comply with securities reporting laws administered by the SEC, they may also have to comply with US tax laws by providing proper tax reports to their customers. There could be a serious push from the IRS on this front. For example, in 2017 the IRS got a court order for Coinbase, a major cryptocurrency exchange in the US, to turn over information on over 15,000 investors. And late last year, the IRS had issued a court summons to Bitstamp, another exchange, to turn over information on another investor.
Cryptocurrency is digital currency, or a “digital representation of value,” as the IRS puts it. You can’t see it, hold it in your hand, or put it in your wallet. Cryptocurrencies are subject to taxes. Generally, the IRS considers there are taxable and non-taxable events that will determine whether or not you have to report capital gains or losses on your tax return.
Taxable events include
✔ Converting cryptocurrency to fiat currency (like the US dollar).
✔ Trading cryptocurrency with another cryptocurrency.
✔ Earning cryptocurrency for providing services.
✔ Purchasing goods and services with cryptocurrency.
✔ Gifting cryptocurrency (above certain thresholds).
✔ Selling a cryptocurrency on 1 exchange, and then purchasing that same cryptocurrency on another exchange.
Non-taxable events include
✔ Buying cryptocurrency with fiat currency.
✔ Donating cryptocurrency to a tax-exempt organization (you may be eligible for a charitable deduction).
✔ Gifting cryptocurrency (subject to some limits).
✔ Transferring cryptocurrency between wallets that you control, as long as no assets are bought or sold.
✔ Coins or tokens allocated in an airdrop or fork are not taxed until they are sold.
As you can see from this article, there are so many ways to define, regulate and tax cryptocurrencies, and many countries are currently in the process of developing these standards. We expect many more countries to issue rules and seek to tax these transactions in the coming years. They may follow the framework set by countries with well-defined guidelines, such as the U.S., or go in a completely different direction. This is a rapidly evolving field that will require constant vigilance.
Disclaimer: This material has been written for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.