This blog is in continuation of the series on Implications of Direct and Indirect Tax on Cryptocurrency. This blog shall elaborate upon the tax implications on cryptocurrency from a global perspective.
With the advancement of technology globally, the most important change in the field of taxation has been the shift from manual filing and assessment of tax returns to online filing and assessment of the same. The next important change seems to be on the lines of implication of the Blockchain technology and the virtual currencies following the same on the taxation system.
Levy of taxes on income and capital gains from Bitcoin and other cryptocurrencies is now common in various countries such as the United States of America (USA), the United Kingdom (UK), Australia, etc. However, there are several countries that are bucking the trend, and it is keen to see how this emerging asset class evolves to encourage innovation. Even in these countries, tax laws are subject to change and are often complex.
While some countries are putting pressure on investors and levying taxes on income and capital gains from Bitcoin transactions, many are taking a different approach with an aim to promote better adoption and innovation within the crypto industry. The countries such as Germany, Singapore, Switzerland, Belarus, etc. have implemented friendlier legislation, and allowed investors to buy, sell, or hold digital assets with no tax liability.
Hereinbelow, we seek to analyze the following:
- Diversity of approach in taxation of cryptocurrencies at different levels
- Taxation of cryptocurrency in various crypto trading countries.
- Stand of India in taxing cryptocurrencies and its way forward.
- International taxation structure with reference to cryptocurrencies and the problems associated with it.
APPROACH TO TAXATION OF CRYPTOCURRENCY
The approach to levy tax on cryptocurrency varies due to treatment of different events in the lifecycle of a unit of cryptocurrency – focusing on its creation and the various forms of exchange or disposal. The following are the different approaches adopted by different countries for taxing cryptocurrency depending on its legal status and at different stages of its cycle of exchange.
- As a currency for Income tax purpose
In certain countries, there is a degree of uncertainty over how cryptocurrencies are defined which may result in different interpretations of the tax treatment. As cryptocurrencies are generally considered to be a form of intangible property or financial assets rather than a currency for income tax purposes, local property tax rules, rather than foreign exchange tax rules are likely to be applicable on such currencies.
Very few countries consider cryptocurrencies to be a type of currency (foreign or domestic) for tax purposes and due to such currencies being decentralized, there is a lack of backing, price volatility and limited use of such virtual currencies as a means of exchange.
On the other hand, countries like Belgium, Italy, Poland, etc. consider cryptocurrencies to be similar to currency for tax purposes. Similarly, for income tax purposes, a number of countries that have issued a statement on the matter have declared these to be a form of property for tax purposes.
|Intangible assets other than goodwill||Australia, France, Spain, Switzerland and United Kingdom|
|Financial Instrument or asset||Argentina, Denmark, Israel, Japan and South Africa|
|Commodity and Virtual Commodity||Canada, China and Indonesia|
|Currency||Belgium, Italy and Poland|
|Legal Payment method||Japan|
|Not specified||United States of America|
- At the stage of creation i.e. Mining
Most commonly, countries consider the receipt of a mined unit of virtual currency to be the first taxable event. Virtual currencies may be created in the process of mining (via rewards under a proof of work protocol), or initial airdrops or Initial Coin Offerings (ICOs) of new tokens.
Various countries such as Andorra, Argentina, Austria, Colombia, Finland, Japan, New Zealand, Norway, South Africa, the United Kingdom and the United States consider that the first income tax event takes place on the receipt of newly minted tokens.
In case when cryptocurrency is taxable on receipt, the value of the unit of cryptocurrency received is included in taxable income (other capital income, or miscellaneous income) once the token is received.
Income tax, in this case, is applicable at the normal rate within that category of income, either at personal or corporate income tax rates. The costs associated with deriving that income are deductible.
- At the stage of disposal i.e. Purchase and Sell
In case when cryptocurrency is treated as an asset; a number of countries such as Australia, Canada, Singapore, Sweden, etc. indicate that no tax is payable until disposal of the asset. Here, the taxable event occurs when the cryptocurrency is disposed.
Disposal of the cryptocurrency may occur in exchange for consideration including fiat currency, another virtual currency or digital asset. The cryptocurrency may be disposed in exchange of goods or services or as gift or can be inherited.
TAXATION OF CRYPTOCURRENCY IN TOP TRADING COUNTRIES
This section deals with countries that impose tax on cryptocurrency under different heads of law based on their approach and the countries which do not tax cryptocurrency considering their legal status and regulations.
I. Countries where cryptocurrency is taxable-
- UNITED KINGDOM (UK)
In UK, income from mining is treated as taxable on receipt, whether received by individuals or in the course of trade. If the mining activity is not carried out in the course of trading, receipt of new virtual currencies results in miscellaneous taxable income for the miner. The transaction fee associated with mining is also treated in the same way.
The income generated is estimated at the value of the unit of cryptocurrency in Pound Sterling at the time of receipt. If the mining activity amounts to a trade, the value of the assets at the time of receipt will be included in taxable income as trading profits.
Further, gains realized when the cryptocurrency is disposed of are then taxed under capital gains taxes. However, airdrops of cryptocurrency with a purpose to create awareness about a new token or increase liquidity of the token in its initial stage, if not received in exchange for consideration, but rather gives rise to a capital gains liability on disposal are not taxable in UK.
The UK considers cryptocurrencies to be property for the purposes of the inheritance tax law. The cryptocurrency will therefore count towards the total value of the estate, which will be taxed if it exceeds GBP 325,000 and the recipient will pay capital gains on increase in value from the date of receipt.
The gifting of cryptocurrencies is a taxable event for the donor, on the other side of the transaction, the recipient is deemed to have received the gift at the market value at the time of donation excluding the reliefs claimed by the donor while paying capital gains tax on the disposal of the asset.
However, if capital gains tax is not payable on the disposal, for instance due to a trading or small business exception, the recipient may pay capital gains tax on the basis of the donor’s acquisition cost when the cryptocurrency is subsequently exchanged. Gifts to charities are not subject to capital gains tax.
Value Added Tax (VAT)
In the UK, crypto-mining is treated as out of the scope of VAT as it does not constitute an activity for VAT purposes due to the lack of a link between the services provided and the consideration, as well as the lack of a customer for the mining services.
Similarly, exchanges in cryptocurrencies are out of scope, although VAT remains payable on the supply of the goods or services for which cryptocurrencies are exchanged. Services provided by exchange platforms are exempt, in line with the broader treatment of financial services.
- UNITED STATES OF AMERICA (USA)
In USA, a taxpayer who mines cryptocurrencies must include the fair market value of the virtual currencies in gross income as at the date of receipt. If the mining constitutes a trade or business, the net earnings from the trade are considered self-employment income when received.
Gifts to charities do not result in capital gains or losses and may be able to be deducted against other income at the fair market value of the cryptocurrencies donated.
The US Internal Revenue Service recently has clarified that for federal tax purposes, cryptocurrency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
A taxpayer who receives cryptocurrency as payment for goods or services must, in computing gross income, include the fair market value of the cryptocurrency, measured in US dollars, as of the date of receipt of the cryptocurrency.
In Australia, the timing of the first taxable event differs depending on whether crypto-mining is carried out as part of a business activity, if so, any cryptocurrencies generated via mining are treated as trading stock income.
Losses made from the business of mining are deductible against the taxpayers other income. If the mining is not conducted as part of a business, the mined tokens are first taxed under the capital gains tax on disposal.
Normally, capital gains tax rates and rules apply, although the Australian Taxation Office has indicated that the personal use exemption is unlikely to apply to capital gains made on the disposal of a unit of virtual currency, unless they are used to make online purchases for personal needs, rather than for investment.
In Australia, use of cryptocurrencies was previously treated as a taxable barter event. The law was amended from 01.07.2021 to treat the purchase of goods and services with cryptocurrencies as not being a barter event, and to treat exchanges of virtual currencies and/or fiat currency as exempt from Goods and Services Tax (GST) as financial services.
In Canada, cryptocurrencies acquired via mining activities of a commercial nature are considered as business income at the value of the mined asset when the asset is received, and is treated as inventory of the business.
However, if the acquisition via mining is considered to be a speculative investment, the first taxable event occurs on the disposal of the asset.
- EUROPEAN UNION (EU)
Under the EU VAT Directive, depending on how the cryptocurrency transactions are characterized, the said transactions can be treated as (a) out scope of VAT; (b) within the scope of VAT but exempt; or (c) taxable.
In case when the cryptocurrency is considered to be electronic money, currency, a negotiable instrument or a security, the same will be exempt under Article 135(1) of the EU VAT Directive. Cryptocurrencies are most appropriately treated as a negotiable asset, bringing them within the exemption in Article 135(1)(d).
In October 2015, the European Court of Justice (ECJ) ruled in the case of Skatteverket v. Hedqvist [ECLI:EU:C:2015:718] that the transactions consisting the exchange of traditional currency for virtual currency would amount to a supply of services for consideration within Article 2(1) of the EU VAT Directive.
In Singapore, miner’s profits from the receipt of cryptocurrencies are taxable if the miner performs the activity with the intention of profiting, provided the gains or losses are assessed to be trading in nature.
Companies engaging in mining activities are normally regarded as carrying on a business of mining and normal income tax rules apply upon the disposal of the tokens. Contrastingly, miners that are performing activities as a hobby or as a long-term investment need not to pay income tax on their gains, as per normal income tax rules.
In Singapore, before 01.01.2020, the exchange of a cryptocurrency was regarded as a taxable supply of services for GST purposes, unless it met the definition of an exempt financial service. Therefore, the exchange of virtual currencies, whether for other virtual currencies or fiat currencies, together with the issuance of ICOs for consideration, gave rise to a GST liability.
Moreover, the use of cryptocurrency in payment for goods and services gave rise to a barter trade. As for the supply of goods and services made in exchange for virtual currencies, GST remains chargeable on that supply. The supplies of services by intermediaries also remain taxable, as does a mining service rendered to identifiable parties for consideration.
Prior to 01.07.2017, sales of cryptocurrencies were subject to VAT in Japan if the transferor was located in Japan. Since 01.07.2017, VAT has not been charged on exchanges provided that the relevant token meets the definition of crypto asset under the relevant law. In effect, virtual currencies in Japan are treated in the same way as sovereign currencies in terms of VAT.
II. Countries where cryptocurrency is Non-taxable-
Countries including Chile, France, Latvia, Poland, Grenada, Italy, the Netherlands, Portugal and Switzerland do not consider exchanges made by individuals to be taxable event. .
The following can be the rationale for excluding cryptocurrency transactions from the ambit of taxation:
- To avoid difficulties in establishing the fiat currency value of a trade happening entirely between two virtual currencies, wherein it is difficult to assess the fiat currency;
- To encourage trading in virtual currencies by providing tax consequences only when an exchange happens with fiat currency or goods or services.
Following a ruling by the Portuguese Tax Authority in 2016, exchanges in cryptocurrencies are not treated as taxable income in most cases as they do not fall within the definition of capital gains or of capital income for tax purposes. They may, however, be taxable as business or professional income if they constitute a professional or business activity of the taxpayer.
The buying and selling of cryptocurrencies is treated akin to transactions with conventional means of payment. The profits and losses from these transactions are therefore without tax consequence: gains are non-taxable and losses are non-deductible. However, if the type and scope of the transactions is sufficient to be considered commercial, the capital gains may be taxable under income tax and the losses deductible.
Individual capital gains from mining assets are not taxable, provided that the activity is carried out as private asset management. However, if the mining is seen to be a lucrative business activity, capital gains taxes apply on disposal of the asset, and losses are deductible.
Transactions involving cryptocurrencies are out of the scope of VAT, if exchanged for other forms of virtual currencies or for fiat currency. Similarly, exchanges for other goods and services are subject to VAT only on the supply of the good or service, but are not a barter transaction.
The virtual currencies held by individuals in Switzerland are taxable capital under movable capital assets and are subject to cantonal wealth taxes. For the purpose of tax assessment, virtual currencies must be converted to Swiss francs. The conversion rates for certain virtual currencies such as Bitcoin or Ether are provided by the Federal Tax Administration (FTA).
In Italy, transactions of individuals in cryptocurrencies are not generally taxable, unless the same are deemed to be speculative. The proceeds arising from speculative exchanges of cryptocurrencies are subject to the standard rules for income arising from trades of foreign fiat currencies (i.e., subject to a flat 26% substitutive tax for Italian resident individuals and to the standard corporate income tax for businesses).
Companies subject to corporate income tax must pay taxes on the exchange movements between cryptocurrencies and fiat currencies in Italy. The Italian tax authority has indicated in private rulings that cryptocurrencies are akin to foreign currency.
In France, the General Tax Code, Article 150 VH bis, indicates that exchanges of cryptocurrencies for a fiat currency, for goods other than digital assets, for a service, and for another virtual currency, when the difference in value is paid in fiat currency, are taxable.
Any exchange of a virtual currency for another virtual currency is not considered as a taxable event. In the case of such a transaction, the French tax authority’s guidance indicates that the fees linked to a transaction and the rewards given to miners to validate the operation are also exempt.
- THE NETHERLANDS
The tax treatment of cryptocurrencies owned by individuals in the Netherlands is different compared to many other countries wherein, the cryptocurrencies held by an individual tax resident will be taxed under the presumptive regime for saving and investments.
- NEW ZEALAND
It is one of the very few countries to take a different approach to the VAT treatment of cryptocurrencies, although the current approach is under review with the goal of providing simplicity and certainty.
In New Zealand, the GST treatment of traded or sold crypto-assets is determined on a case-to-case basis and the cryptocurrency may be fully taxed, exempt or zero-rated, depending on the circumstances.
The Government would treat exchanges in cryptocurrencies as exempt from GST and is seeking feedback on whether this should apply to all transactions or just those with a New Zealand-resident recipient.
Related services that are not in themselves supplies of crypto-assets (such as mining, exchange services or general business or computing services) will continue to be subject to the existing GST rules and treated as either subject to GST at the standard rate (if provided to residents) or as a zero-rated supply to a non-resident.
TAXATION OF CRYPTOCURRENCY IN INDIA – WAY FORWARD
The Supreme Court of India while dealing with the legality of cryptocurrency in the case of Internet and Mobile Association of India v. Reserve Bank of India [Writ Petition (Civil) No. 528 of 2018] held that:
“What an article of merchandise is capable of functioning as, is different from how it is recognized in law to be. It is as much true that Virtual Currencies are not recognized as legal tender, as it is true that they are capable of performing some or most of the functions of real currency. Therefore, Virtual Currencies cannot be considered just goods or commodities.”
Services have been defined under Goods and Services Tax Act, 2017 as anything other than goods, money and securities but include activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
The Trading of cryptocurrencies do fall under definition of Service and shall be liable to GST. The bigger question though remains how valuation of such service shall be done. Whether the gains shall be made liable to GST or be taxed in some other manner.
Cryptocurrency in India may attract indirect tax liability, but the position of law is still unclear as the RBI has not yet granted this asset class the status of a legal tender. Until it is declared as a legal tender, Cryptocurrency and its trading is a grey area for the law enforcement agencies of any country for the indirect and direct taxation of Cryptocurrencies. Though Cryptocurrency is not a legal tender in India, many people have started investing in it.
As far as liability under direct tax is taken into consideration, Cryptocurrency can be taxed under the purview of ‘Income from Capital Gains’ or ‘Profits and Gains of Business and Profession’; under the Income Tax Act, 1961, depending upon the nature of investment.
The implementation of GST in India has already brought many changes in the taxation system. The Government has started Data Mining considering the information submitted by assessee in GST return, Income tax return and Transfer Pricing data.
- Probable benefits
Cryptocurrency is governed by blockchain technology. With the adoption of Blockchain technology there will be simplification of tax compliance and increased transparency. The characteristics of Blockchain technology such as real-time technology, immutable, decentralized, trusted and transparent transactions are the very characteristics that have become increasingly important in the global tax system.
The international drive for tax transparency and anti-tax avoidance measures has created uncertainty in international transactions, and increased compliance burdens. Blockchain technology has the potential to simplify and automate tax compliance and transparency; once companies have the blockchains in place recording all expenses and every transaction on their books, tax authorities may obtain access to this data to calculate and enforce payment of taxes in real time and reduce the opportunity for fraud and avoidance.
Though it is difficult to characterize the cryptocurrency transactions as embraced by an ever-increasing number of financial services providers, when it is brought into scope by the regulatory environment, it could change all aspects of doing business, including managing tax cost.
In the current digital era, the transactions are huge. Blockchain technology will be a revolutionary step for doing audits. The processes during the audit will be fast and accurate. With new demand for assurance, Blockchain could also change the nature of auditing, reducing the auditors role in checking and validating account transactions and instead moving them further up the value chain.
- International Tax concern
Cryptocurrency has the potential to become an international currency between countries and individual business. However, the concerns would remain over offshore transactions because of the ability of digital currencies to cross borders unrestrictedly and inconspicuously making it an arduous task for tax authorities to bring the transactions under the scanner.
Efforts would be required from international organizations namely; the Organization for Economic Co-operation and Development (OECD) and United Nations (UN) to develop a cumulative framework to curb tax evasion and money laundering practices.
The OECD in 2014 released a working paper on Bitcoins identifying the commercial benefits and risks associated with technology. The OECD recognizes the tax Challenges imposed by Digital Economy, and by virtual currencies under its Base Erosion Profit Shifting Action is working extensively to develop a relevant framework to the issue.
Cryptocurrencies are a quick developing crypto-resource that represents various difficulties for taxing strategy. These difficulties emerge from a number of variables because of the idea of these resources, including the absence of concentrated control, (pseudo) obscurity, valuation hardships, hybrid qualities (for example counting the two parts of monetary instruments and immaterial resources).
Various difficulties emerge from the fast development of the supporting innovation and of virtual monetary standards themselves, including later improvements in the ascent of stable coins and Central Bank Advanced Digital Currencies (CBDCs).
The taxation of virtual currencies requires policymakers to balance a number of competing goals and perspectives. Even states could issue specific official directions or guidelines for regulation of cryptocurrencies, the income associated with it, the boundaries between different types of crypto-assets, and on how other forms of these assets are treated for tax purposes, which could be useful.
Taking into consideration the VAT treatment, the same would preferably be relied on the treatment of traditional payments instruments and other monetary resources in a particular jurisdiction.
While exchanges are regularly absolved or outside the extent of VAT in many nations, there is less consistency and lucidity on the treatment of mining or different kinds of administrations, which could be checked against the more extensive VAT system for monetary instruments.
Similarly, excluding exchanges between different types of virtual currencies from income tax consequences may also ease compliance requirements, while still ensuring that gains are taxed when tokens are converted into fiat currency or used to purchase goods and services. Thus, with the increasing number of investors and emergence of different virtual currencies, a specific regulation and taxing standard becomes the need of the hour.
Team AMLEGALS assisted by Ms. Palak Rawat (Intern)
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