If you think doing your taxes is complicated now, adding cryptocurrencies to your current financial picture could make things downright labyrinthine, depending on where you live.
One thing is certain: crypto’s early days, in which individuals’ transactions flew largely under regulators’ radar, are long past. Cryptocurrencies have gotten the attention of regulatory and tax agencies around the world and – while they’re being treated in many different ways – they are increasingly being regulated and taxed.
Beyond that, here’s what else you need to know:
Taxation depends on classification
“One of the many questions that arise from allowing investments in and the use of cryptocurrencies is the issue of taxation,” notes a 2018 US Library of Congress report on ‘Regulation of Cryptocurrency around the World’. “In this regard the challenge appears to be how to categorize cryptocurrencies and the specific activities involving them for purposes of taxation. This matters primarily because whether gains made from mining or selling cryptocurrencies are categorized as income or capital gains invariably determines the applicable tax bracket.”
For example, the report stated, Israel taxes cryptocurrencies as assets and Bulgaria treats them as financial assets while Switzerland taxes them as foreign currencies. In the UK, corporations pay corporate taxes and unincorporated businesses (such as sole traders) pay income tax on their cryptocurrency earnings, while individuals pay capital gains taxes.
According to a 2015 decision by the European Court of Justice, cryptocurrency gains in the EU are not subject to value-added tax (VAT).
The Library of Congress report also noted that, in most countries, no tax is assessed on cryptocurrency mining. “However, in Russia mining that exceeds a certain energy consumption threshold is taxable.”
Different types of taxes might also apply
As this overview of Europe from the law firm Osborne Clarke illustrates, cryptocurrencies can be subject to a variety of different taxes in different jurisdictions. Germany, for instance, might tax crypto profits “as capital gains, current income or not at all”. Mining can be taxed as business income but isn’t subject to VAT. However, crypto wallet providers are subject to VAT for the revenues they earn. And cryptocurrency issues or transfers might also be subject to inheritance or gift taxes.
“It is likely that for each jurisdiction, further law or guidance will be issued,” Osborne Clarke adds. Which brings us to the final point to remember.
Tax issues are continually evolving
In the US, the Internal Revenue Service first released guidance on what taxpayers needed to know about virtual currencies in 2014: “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”
Two years later, the IRS served a ‘John Doe’ summons on the cryptocurrency exchange Coinbase seeking information about 500,000 customers who used the service between Jan 1, 2013, and Dec 31, 2015. Coinbase was later ordered by a US District Court to provide the IRS with a range of user data for “certain higher-transacting customers” – about 13,000 in all – during that period.
And in July 2018, the IRS announced the rollout of five new compliance campaigns, including one for tax withholding compliance for virtual currencies. “Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical,” the agency said. “The IRS is not contemplating a voluntary disclosure program specifically to address tax non-compliance involving virtual currency."
Meanwhile, the latest tax bill in Congress “eliminated a profitable tax loophole known as the ‘like-kind exchange’, which had allowed investors to sell one cryptocurrency and buy another (or others), all while avoiding capital gains taxes,” the Motley Fool reported in April 2018. “Now, all sales should be reported as a capital gain or loss.”
In the UK, meanwhile, the HMRC’s published guidance on cryptocurrency taxation dates back to 2014, which – as Osborne Clarke notes – “is a long time in the cryptocurrency world”.
The law firm adds, “It is likely that the key tax issue for funds looking to invest in cryptocurrencies will be to determine whether the activity will be treated as an investment or trading activity. This will be a key issue for non-UK investors looking to invest in UK funds as UK trading activity can create a UK tax liability whereas investment activity will generally not.”