Cryptocurrencies are an emerging asset class. As the technology continues to grow by developing and adopting frameworks to enable Cryptos attain the expected use case, global governments are shaping up taxation structures. Which could be upsetting for some, after all Cryptos were supposed to set us ‘free’ right? Well, when governments started getting involved in virtual currencies calling for regulations, it was bound that taxation would be part of them.
The US government, through its Internal Revenue Service (IRS), is responsible for providing guidelines to its citizens on how to comply. Its 2014 guideline however, isn’t entirely sufficient. Similarly in the UK, Her Majesty’s Revenue and Customs (HMRC) gave a brief on Crypto taxation in the same year. The HMRC brief is a ‘broadly speaking’ document generous on case by case treatment of taxable Crypto activity. Without comprehensive guidance, Crypto users could find themselves on the offensive involuntarily.
Which brings us to scrutinize the available information to make sense for laypersons whose scope on taxation may not be deep enough. To begin with, it is worthwhile to note that countries differ on their definition of Cryptocurrencies (Germany says they are currencies while US says Property) – so would their taxation approach. Also, without adequate or conclusive understanding of Crypto, countries align Crypto taxation to normal taxation laws. It remains to be seen whether Cryptocurrencies will be designated special set of laws as the industry becomes more mature.
Basically, Crypto taxation policies surround usage and the entities involved, including utility tokens. Individual and Corporate usage are handled differently before the law. There are three main uses of digital assets; means of payment, trading and investment. We’ll look at each separately.
Crypto as Payment method
Crypto is accepted as a medium of settlement for goods and services by a number of individuals, merchants and companies. This sort of settlement extends to salaries. When received for personal gain, they are treated as income and are subject to Income tax (IT). On the flipside, Cryptos paid to companies for gain attract Corporate Tax (CT). When received by merchants as payment for goods that are subject to Value Added Tax (VAT), liability is incurred by the customer in the fiat equivalent of the taxable amount at the point of sale.
Crypto received through mining activity is regarded as income in both the US and UK. They therefore carry the liability for IT
Investing in Crypto
This is a favorite practice among Crypto users. Many of them are pulled by the seemingly ‘get rich quick’ possibility presented by highly volatile prices. All amounts realized from a sell of Bitcoin at a higher price than that which was acquired at, calls for Capital Gains Tax (CGT). Whether one bought the said Crypto with the intention of selling at a later date (active investment) or held coins received in a payment process (passive investment), both attract CGT. Recently, there has been widespread plunge in Crypto prices. Consequently, most users opt to hodl their assets awaiting better rates. This creates an aspect of short and long term holding. According to taxation laws in many jurisdictions, longer investments face lower rates.
Trading in Crypto
Holders use Crypto to trade against other Cryptos or fiat. When trading, the expectation is that there will be a gain. This gain is regarded as income and attracts IT. Trades that take longer spans of time attract CGT.
Accounting for Crypto
At the moment, reporting on Crypto transactions for the purpose of taxation is the sole responsibility of the user. Also, Crypto exchanges do not report transaction to users. Accordingly, users create the records they will eventually file themselves or through a company like Harvex cryptocurrency accountants. It is important to keep proper records to ensure there are no loses made through wrongful taxation. Date of buy and sale vis a vis the trading prices at both times are significant in calculating gains and losses which will then determine taxable amounts. Hence, they form the most integral part of the records.
Where it is not possible to personally keep track of transactions, there are accounting software available online. Even better, one can enlist the services of professional tax accountants who have knowledge that could come handy in significantly reducing taxes by identifying waivers and loopholes.Coinabse provides form 1099-K to users who receive at least $20,000 cash for sales in not less than 200 transactions in a year.