Since the launch of bitcoin (BTC) in 2009, cryptocurrencies have greatly developed, and the anonymity that they provide their users with has left a number of tax agencies trying to catch up with the trends.
What are some of the biggest crypto taxation challenges, and what are governing bodies worldwide doing to overcome them?
Crypto Taxation Worldwide is “in Development”
Digital assets are often treated as properties and are subject to capital gains taxes of similar nature to those of traditional assets, Aharon Miller, the co-founder and COO of Oobit told Technopedia.
Although this, of course, varies by jurisdiction, creating challenges as some choose to actively regulate cryptocurrencies while others refine strategies.
Andrew Silverman, a tax analyst at Bloomberg Intelligence, described cryptocurrency taxation worldwide as “in development,” noting:
“There has been some effort to try and create a uniform cryptocurrency tax regime within the context of the Base Erosion and Profit Shifting initiative at the OECD [Organisation for Economic Co-operation and Development], but other issues, such as the global minimum tax, have taken priority.”
Meanwhile, the ministerial council of the OECD approved the Crypto-Asset Reporting Framework at the start of June, some progress is being made on global reporting requirements.
However, the next step for many countries remains to adopt these principles into their local laws, Silverman said.
Differences in Crypto Taxation Worldwide
Countries worldwide are finding it hard to agree on what exactly would be considered as taxable income when it comes to cryptocurrencies.
The Internal Revenue Service (IRS) in the U.S., for example, notes that the receipt of a staking reward is considered taxable income. In the meantime, the French tax agency sees staking rewards as only taxable once they are converted into fiat currency, Bloomberg Intelligence’s Silverman explained.
“That gets to a fundamental difference in the way that France and the U.S. view cryptocurrency. The U.S. sees crypto as having value in and of itself whereas France thinks cryptocurrency only has value once it’s converted into cash.”
Oobit’s Miller also noted that in the U.S. and Canada, cryptocurrencies are seen as “property, attracting capital gains tax on trading profits,” while the UK taxes mining, staking, and lending gains income as well as capital gains on crypto trading.
“Singapore takes a milder stance, levying income tax only on trading profits, excluding mining and similar gains. These distinctions can notably affect international crypto involvement, potentially leading to dual taxation, highlighting the importance of tailored tax guidance,” he added.
Although, not all countries are equally as restrictive when it comes to crypto taxation. El Salvadore, for example, uses BTC as a legal tender, similar to the U.S. dollar, their legal currency.
China, on the other hand, is “among the most restrictive crypto tac regimes because the country has introduced its own CBDC [central bank digital currency] and it doesn’t want bitcoin to compete with it,” Silverman explained.
“Germany, the UK and the U.S. probably have the most fleshed-out crypto tax regimes. In terms of innovative tax regimes, Brazil might be a good example. Similar to U.S. states like Colorado, which is also very pro-crypto, you can pay your taxes in cryptocurrency in Brazil and the annual de minimus threshold there is R$35,000. People also tend to point to Portugal, Singapore and Slovenia as having made their countries crypto-friendly.”
Miller added that Lithuania also “stands out as an excellent choice for establishing [crypto] companies like Oobit”. This is because the country has cultivated a favorable regulatory landscape for the industry and offered transparent guidelines that were aligned with international standards and combatted money laundering and other related concerns.
Crypto Tax Challenges
The lack of a global consensus could be one of the biggest challenges governments may face when it comes to enforcing taxation. This could also complicate efforts to prevent crypto tax avoidance as people chose to relocate to countries where regulations are much more lenient, Miller said.
The volatility of crypto markets also serves as another major challenge, as it complicates the determination of their fair market value and potentially leads to tax evasive opportunities.
In addition, Silverman explained that in many instances, one of the primary challenges in taxing cryptocurrencies is the government’s lack of understanding of what exactly they are trying to tax.
“Legislators and regulators rely on older tax notions to frame new statutes and regulations and cryptocurrency often does not fit very well into pre-existing frameworks. The problem is that creating new templates for tax rules is usually very difficult for governments. Cryptocurrency is also developing much more quickly than governments can regulate it. That makes it tough for governments to grapple with.”
Both Miller and Silverman also added that the decentralized nature of cryptocurrencies and the fact that they can be traded on a number of different decentralized platforms makes it harder for them to track digital assets. Thus, further complicating tax opportunities.
“Governments, like the U.S., are spending so much money on software that they hope will help identify transactions that can then be taxed. The U.S. is also using John Doe summonses and, therefore, relying on cryptocurrency service providers to fill the IRS in on what taxpayers have, in some cases, been reticent to reveal,” Silverman said.
Streamlining Crypto Tax Reporting
Cryptocurrency tax software can be a great tool to help traders calculate the taxes from their digital assets as well as file tax returns, Miller explained.
Although for governments to ensure crypto tax compliance, they would need to first accept the digital assets as a “legitimate financial instrument,” Silverman added.
“I think the basic premise for a lot of crypto tax rules today is that there is a level of tax avoidance involved. I think that has fostered a lot of distrust between tax authorities, especially in the U.S. and those in the cryptocurrency industry. Conflict with businesses and an adversarial approach from a tax authority just is not effective.”
This means that for there to be effective tax rules, governments should make an effort to familiarise themselves with the cryptocurrency industry.
The Future of Crypto Tax
Some countries, like the U.S., are trying to broaden their scope of crypto taxation, with recent guidance being issued on staking that solidified the Treasury’s official position.
“The U.S. views crypto as a major source of tax avoidance, so the IRS has really stepped-up enforcement. Other countries are also moving forward on instituting better reporting regimes to help understand the landscape before they start adopting more sophisticated tax regimes.”
The intricate landscape of cryptocurrency taxation reflects the evolving nature of the industry and the challenges faced by governments worldwide.
Their decentralized nature, coupled with their rapid development and varying definitions across jurisdictions, has made establishing uniform tax regulations a complex endeavor. While some countries like Germany, the UK, and the U.S. have made strides in fleshing out crypto tax frameworks, disparities persist, hindering a global consensus.
As the future unfolds, the path to effective crypto taxation hinges on governments’ commitment to understanding and embracing the industry, fostering cooperation, and cultivating trust between tax authorities and the cryptocurrency sector.