Introduction of Taxation in Cryptocurrency
By: Joseph Reis – owner of Xtechnews.com
Many people have been waiting for the bitcoin bubble to burst. Bitcoin is one of the most common decentralized cryptocurrency whose discussions got hot in early 2017. The coin has grown value over the years and is now considered an investment like any other. Now several governments through their central banks are thriving to give clarity on the place of bitcoin in the national and international financial systems.
Many countries have been silent about the legal provisions of cryptocurrency and how the coins can be controlled and regulated. Some of the jurisdictions have paid little attention on the way bitcoins and other cryptocurrencies are supposed to be taxed. If you are one of those people who have been waiting for an opportunity to mine and trade on bitcoins, then there are several legal provisions that you will have to satisfy throughout your investment period.
2018 looks like the trademark year when it comes to taxing cryptocurrencies. Internal Revenue Service (IRS) is now treating cryptocurrency as property and hence there are capital gains that benefit from holders. With all the excitement that followed after the introduction of cryptocurrencies in the market, it is easy to forget about crypto taxation.
With an increasing number of people who report crypto gains, then it is necessary to think about this new source of government revenue. Some of the governments think that cryptocurrency holders have been avoiding taxation and enjoying the full gains from this new bay. Holders have not been reporting their crypto transactions on their tax returns and hence considered an illegal act.
In USA, the IRS has not provided satisfactory guidance regarding Bitcoin Taxation. In addition, both the public and the crypto community consider Bitcoins an altcoins as virtual currencies and hence IRS considered it as property for taxation. On the other hand, any means of trading bitcoin i.e. selling, spending and even exchanging crypto tokens for other currencies is an ordinary income.
With bitcoins regarded as the most common cryptocurrency, everything that is discussed with regard to bitcoin taxation applies to all the other bitcoins such as OLXA coin, ethereum coin, and all the other coins that are traded worldwide.
Mining Bitcoins and other coins
This is considered as an ordinary income that is equal to the fair market value of the coin the day it was successfully mined. The last thing any bitcoin miner expects is to be audited or be slapped at the back with taxes due to ignorance of the tax bi-laws of their respective country laws. The IRS has recently highlighted the tax implications of bitcoin mining in reference to all the other coins in Notice 2014-21, Q-9. The provisions define an individual who mines bitcoins as a trader or a self-employed individual. Therefore, they are projected to income tax on the income derived from those activities.
Bitcoins received through mining for trade or business is often considered as a source of self employment income. Net earnings in self-employment is equivalent to gross income from trade or business and less allowable deductions. Individuals work as 1099 independent contractors and they are accountable to their own tax.
Recently, airdrops have become a method beyond marketing. Coins would now announce airdrops where those people who hold coins would receive bonus coins that are proportional to the amount of total coins that they initially hold. This is considered ordinary income that is subject for taxation from the day of the air drop. When it is sold or exchanged then there is a capital gain. The IRS started cryptocurrency as property for the US Federal tax purposes and therefore you will have to pay a tax every time you sell cryptocurrency as you gain the profits that accompany the process.
A capital gain tax (CGT) is tax that is paid from all the capital gains and the profits that are realized on the sale of a non-inventory asset that was greater than the amount realized on the sale of altcoins. What this means is that a person who participates in an altcoin which has no gain i.e. a $0 value at the time it was received, if they were to hold onto the coins without spending or even moving them, then they wouldn’t be subject to any CGT.
Converting a cryptocurrency
It is now easier to exchange bitcoins and other cryptocurrencies for fiat money. You can exchange bitcoins into US dollars or any other currency at a gain. This is treated as being sold and hence it is supposed to generate some capital gain. Therefore, you are subject to tax every time you exchange your coins.
When you sell a cryptocurrency that is considered a taxable event, you will have to declare your gain or loss on the specific transaction. However, crypto-to-crypto transactions are what is considered by IRS as ‘’like-kind’’ transactions which will allow you to transact on a similar property where you can differ paying taxes on transactions.
Initial coin offering
This doesn’t fall under the IRS’s tax-free treatment for raising capital. What this means is that they produce ordinary income to individuals and businesses. When it comes to tax considerations in cryptocoins and tokens, those generated by a company through ICO is taxed in accordance with the property received at stardard tax rates.
This is another thing that generates capital gain and capital losses. These gains and losses can be short term or long term and it is subject to different tax rates. Therefore, when you are spending coins and tokens then you should be ready to pay taxes.
Little attention has been given to tax consequences in cryptocurrency mining and trading. Countries lack taxation guidance and enforcement. These two issues have consequences that accompany them. One of them is that they distort competition and cause non-compliance by the tax payers since they don’t have to worry about taxes. The countries also loses a lot of revenue that could otherwise be generated from the taxable income.
2017 is the year ICO and the rise of several coins and tokens took place and it seems that 2018 is the year for regulatory reckoning. Things are getting hotter with the countries starting to grapple with cryptocurrencies and determining how they have to regulate them. Some of the countries are cautious with these coins and hence are implementing laws that are destined to regulate their usage and trade. Although bitcoins have not gained some good reputation in some countries, most of the tax authorities have acknowledged their significance and propose a specific fiscal treatment for these highly influential currencies. There are several countries that have made a decision of ‘’tax-treat’’ for bitcoins. In this brief, I am going to touch on some of them including USA, EU, Germany, and Australia.
The United States
This is the country that I had discussed earlier. The U.S. IRS treats Bitcoins and other cryptocurrencies as a source of income. What this means is that selling, trading or exchanging Bitcoins is projected to a tax rate that is determined by IRS. Any transaction will be taxable according to the principles that are applicable to taxation of property.
You have to report all your Bitcoin transactions to the IRS for taxation purposes. The taxpayers in the country who sell goods and services for Bitcoins or any other coin are obliged to include the value of the received Currency in their annual tax returns.
The European highest court ECJ ruled that all the bitcoin transactions should not be considered for Value Added Tax (VAT). This is applicable under the provision concerning transactions relating to currency, bank notes and coins that are used for legal tenders. What ECJ wanted to make clear to the European Union public is that bitcoins is a currency and not a property that should be legally subjected to VAT.
Despite the fact that purchasing and selling bitcoins is not subjected to VAT, this doesn’t mean that it is not supposed to be taxed for other forms of tax. If you are undertaking transactions using Bitcoins, then you are subject to other forms of tax.
Bitcoins and other cryptocurrencies in this country are subjected to a capital gain tax of 25%. However, all these taxes are levied on the bitcoin holder if the profits are gained within one year of holding bitcoins. If you will manage to hold these coins for more than one year, then your coins will not be considered for taxation. It will be considered as a non-taxable ‘’private sale’’.
This is another country that doesn’t consider bitcoins as money or foreign currency. It is an asset that is held for capital gain. Therefore you have to properly document, record and date the transactions. You have to declare your value in AUD as ordinary income.
The framework of laws that govern taxation in the crypto community differ significantly according to the laws of the jurisdiction. Some of the countries consider bitcoins as currency while others consider it as a property that is gained for capital gains. This is the basis for all the tax regulatory requirements in each country.