There is no single approach to the legal regulation of cryptocurrencies in the world. The methods of taxation of transactions with cryptocurrency in different countries differ, but they can generally be divided into several groups: in some states, cryptocurrency is a financial asset, therefore, as a rule, income tax is used there, while in others cryptocurrencies it is property, so in this case VAT and income tax are used. In addition, some countries have different tax regimes and methods of taxation (income tax, capital gains tax, VAT) depending on the type of cryptocurrency transaction: personal transfers, business or exchange transactions, sales, and others. Also in some countries, cryptocurrency transactions are not taxed.
In this article, we will consider examples of taxation on cryptocurrency in different jurisdictions and their features (note that this article is exploratory and not meant to be taken as legal or financial advice: always do your own research on your personal tax situation!)
Cryptocurrency Taxes in the US and Canada
The United States government recognizes cryptocurrency as a legal means of payment. From 2022, individuals and legal entities are required to declare income from operations with cryptocurrencies. Cryptocurrencies, including NFTs, are treated as "property" for tax purposes in the US.
Basically, profits from digital assets are taxed on capital gains, by analogy with stocks.
However, cryptocurrencies derived from some activities are treated as income and subject to income tax.
Capital gains tax on cryptocurrencies is paid when:
- selling cryptocurrency for fiat (US dollar, Japanese yen, etc.);
- sending cryptocurrency as a gift (anything exceeding $15,000 for the 2021 tax year);
- buying goods and services for cryptocurrency, even small purchases like buying coffee;
- trading or exchanging one digital asset for another. That includes buying NFTs using cryptocurrencies.
The tax is paid on any capital gains, it is calculated as the difference between the price paid for the asset and the price at which it was sold.
Income tax on cryptocurrency is paid in case of:
- obtaining cryptocurrency from an airdrop;
- any interest income in cryptocurrency from lending to DeFi;
- revenue from cryptocurrency mining through block rewards and transaction fees;
- cryptocurrency earned on liquidity pools;
- receiving cryptocurrency as a means of payment for the performance of work.
Investments in cryptocurrency for up to a year are considered ordinary income of an individual, and profits from them are taxed from 10 to 37%. The rate of income tax depends on the taxable amount and the family status of the taxpayer.
For crypto assets held for more than one year, capital gains tax is much lower: 0%, 15% or 20% tax depending on individual or total household income.
If the cryptocurrency holder has suffered losses due to an unsuccessful investment, he can request a tax deduction of up to $3,000. If a person receives cryptocurrency for any service, he must declare such earnings at the market rate on the day he receives payment.
The administration of US President Joe Biden announced its intention to introduce a 30% tax on electricity used to extract cryptocurrency. The authorities made such a proposal to the draft budget for fiscal 2024. Digital Asset Mining Energy (DAME) excise tax provides payments for companies that mine cryptocurrencies because firms do not pay for "the full cost they put on others."
In Canada, cryptocurrency is not legal tender, but can be used to buy goods and services online or in stores that accept them.
Any income from cryptocurrency transactions is treated as income tax by Canada's tax agency. At the federal level, the maximum tax rate will be 38%, but the authorities provide several tax deductions, and thus the rate can be reduced to 10%. Provincial and territorial taxes range from 8% to 16%.
If cryptocurrencies are used to pay for goods and services, authorities see it as a barter deal that is also taxed.
VAT does not apply to cryptocurrency in Canada, as in many countries.
Cryptocurrency Taxes in Asia
Cryptocurrency projects are supported in Singapore. Under the control of government agencies, there are scientific centers in which they study the technologies of distributed registers.
In January 2020, a law was issued that introduced licensing of crypto activities.
In 2014, the main tax service (IRAS) identified bitcoin as a commodity. All transactions with it are subject to fees. Companies that buy and sell bitcoin must pay income tax.
Two types of taxes apply:
- goods and Services (GST) — 7% rate;
- corporate income tax — 17% of the transaction amount.
Japan was one of the first to recognize cryptocurrencies as a legal means of payment. This makes it possible to pay for goods and services throughout the country.
Cryptocurrency is treated as property.
The amount of tax for cryptographic profits depends on the category of personal income tax in which the investor is located. The tax rate is from 5% to 45%. Council tax is 10% and added to any rate, resulting in a maximum tax rate of 55%.
In China, cryptocurrency is completely banned. But the Central Bank of China is actively introducing a digital yuan. It's sometimes called state cryptocurrency, but that's not entirely true. The digital RMB is not listed on the exchanges and is not created for long-term investments and speculation, unlike cryptocurrency.
Cryptocurrency Taxes in the European Union
Operations to exchange national money for Bitcoins and back in the European Union are not subject to VAT. This decision was made by the European Court of Justice in 2015.
The European Commission has published a draft regulation on the regulation of the cryptocurrency market, the main goal of which is to make the financial sphere transparent at the legislative level. The new regulation will establish more stringent requirements for cryptocurrency companies: for example, it will introduce licensing of the company's activities and the minimum authorized capital — €350,000.
Each EU state independently regulates the use and taxation of cryptocurrencies.
Germany classifies cryptocurrency as private money, treating it as foreign currency or intangible property. It can be transferred, stored and bought.
Cryptocurrency transactions are free from VAT and are not subject to capital gains tax. Bitcoin is also not an investment as a stock that is taxed at source at 25%. If crypto assets are sold within 12 months of the purchase, then the profit from the sale will be subject to income tax of 45%.
The State Council of France canceled the tax instruction on cryptocurrencies and revised the procedure for paying taxes on cryptocurrency. A tax on the sale of crypto related to capital gains is levied at a single rate of 30% (flat tax), including social security contributions.
There are two exceptions to this tax rate:
- exemption from taxation of cryptocurrencies in the amount of no more than 305 euros with the provision of a tax return;
- the rate increases to 33 or 34% if the taxpayer receives an exceptionally high income — from €250,000 for an individual.
There is an evolution of this tax system with the introduction of the progressive tax scale.
This change is interesting for people with a tax bracket below 11%.
For people who earn less than 27,478 net taxable: the maximum taxation will be 11% + 17.2% of social security deductions, i.e. 28.2 % (instead of 30%).
This progressive scale is valid from 2023, but will only be applicable in 2024 for the 2023 return.
Mining is taxed on cryptocurrency as a non-profit profit. The crypto community has requested special measures from parliamentarians regarding the mining tax. They are included in the next budget bill.
Cryptocurrency Taxes in the UK
The United Kingdom does not recognize cryptocurrency as a full-fledged currency, however, it has an extremely consistent and friendly attitude regarding crypto business.
Thus, the tax legislation of the country determines that transactions with cryptocurrency in the UK are not subject to VAT. At the same time, here, just like in Lithuania, there is a corporate for companies, which is 19%.
The UK Internal Revenue Service believes each tax case should be dealt with individually. To determine the need to pay tax, the purpose of holding cryptocurrency and the frequency of transactions with it will be taken into account.
The amount of income tax rate may vary from 0 to 45%, depending on the income received.
Cryptocurrency Taxes in Switzerland
Cryptocurrency in Switzerland is correlated with fiat money, for which VAT is not provided. Companies associated with the circulation of digital coins pay taxes at the federal level. But taxes related to capital gains or revenues are levied by the canton authorities. In the books, digital coins are defined as assets subject to taxation on grounds stipulated by Finsa law. The document regulates the collection of taxes on profits at rates of 7.83% at the federal level and 6-12% in the cantons.
Taxation of cryptocurrencies in Switzerland directly depends on the category of assets. If the coins were manipulated, which led to the formation of profits, the rate of 7.83% applies to them. Capital gains tax is levied on the sale of bitcoin at a price above the purchase rate. Cryptocoins are recorded at their carrying amount as recorded in the company's financial register. If the digital currency is not recognized as an asset in a separate project, capital gains tax is not applied to it.
Cryptocurrency Taxes in Bermuda
Bermuda is considered a world leader in regulating blockchain, cryptocurrency and other related activities. In 2018, Bermuda passed a comprehensive digital asset ordinance called the Digital Asset Business Act.
Tax legislation is also extremely loyal here, and therefore Bermuda is often referred to as a "cryptocurrency shelter."
So, in the Islands, the legislation does not provide for either income or capital gains, so no cryptocurrency transactions are taxed.
Taxes on Cryptocurrency in Vanuatu
Vanuatu is a profitably taxed country in the Pacific. The country's tax residents do not pay taxes on income, luxury, capital gains, dividends and interest. Cryptocurrency transactions are not taxed as in other countries
The Vanuatu government legalized cryptocurrencies in 2021 through the Financial Operations Licensing Act No. 9.
Bottom Line
Today, the self-development of cryptocurrency significantly outpaces the tax tools and legal regulations. This can be a big problem both for the participants in cryptocurrency transactions themselves and for national financial control bodies. Further development of the issue is seen in two directions:
- Priority of tax regulation: then all exchanges must report to the tax authorities. Accordingly, all transactions with payments in cryptocurrencies will become transparent and will be subject to taxation in a row with ordinary operations.
- Technological priority: tax authorities will refuse total control due to the existing difficulties, taking into account and calculating taxes and the inability to take into account all aspects and updates. Then the only taxable operation will be the transfer of cryptocurrency to fiat money, respectively, capital gains tax, as well as the purchase of goods and services, and therefore VAT.
What we will come to, only time will tell.
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