After he helped pen the US constitution, Benjamin Franklin noted that he hoped it would last forever. But he knew there are only two things in life that are truly certain: death and taxes.
Anyone hoping to avoid paying tax on crypto should know that Franklin was right. Crypto is, in the majority of regions, taxed in one form or another. It is, however, a complex beast and there are a number of intricacies that you should be aware of when understanding what taxes you’ll need to pay – if any at all.
Bitcoin and taxation
In the past, the speed of crypto’s development and adoption has meant that the regulation around taxation and crypto has occasionally appeared slow moving. It should be noted, though, that there’s been a lot of progress in recent years. Many tax agencies have actually managed to implement innovative policies that harness crypto as a way of making the system better. The Swiss municipality of Zermatt, for example, now lets residents pay their taxes in bitcoin. In New Zealand, the country’s tax agency has ruled that salaries and wages may be paid in cryptocurrencies, as long as the preferred digital coin is pegged to at least one standard, or fiat, currency.
The same is true of the taxation of crypto. In a recent PricewaterhouseCoopers (PwC) report, 61% of jurisdictions surveyed said they’ve issued guidance on the calculation of crypto capital gains and losses for individuals and businesses.
These rules vary from country to country, with some nations taking a more liberal approach than others. In Belarus, for example, mining and investment in cryptocurrencies are deemed personal investments, and so exempt from income tax and capital gains. The UK, on the other hand, has more stringent measures in place. HMRC says that you need to pay capital gains tax on every disposal of cryptocurrency. Disposal here refers to the sale of cryptocurrency for fiat currency (like pound sterling), the exchange of cryptocurrency for another cryptocurrency (e.g., selling bitcoin to buy ether), and the gifting of crypto to someone other than a spouse or civil partner.
One of the reasons behind the diverse array of rules is the different ways tax bodies around the world define what exactly crypto is and its function. The PwC report noted above also found that most jurisdictions view cryptocurrencies as a form of property from a tax perspective. This means anything bought with a digital currency is liable to be taxed as a capital gain whether short or long term, depending on how long the asset is held. For example, if you buy a cup of coffee using bitcoin that you purchased when it was worth $10,000, you must also account for the price of bitcoin at the time of the coffee purchase. If bitcoin is trading at $1,200 when you buy the coffee, you’ve purchased a dollar-denominated good with another asset that is now worth more in dollars than it used to be. That means the amount of bitcoin you spent on the coffee will be taxed according to capital gains rules.
Very few actually consider digital assets as currency for taxation purposes. Germany is unique among major economies in that it considers bitcoin to be private money, as opposed to a currency, commodity, or stock, but it’s unusual in this regard.
Keeping up with the pace of change
The other problem for people looking to understand what taxes they need to pay is that the rules are still subject to frequent change. Bitcoin was only invented in 2008, went live in 2009, and truly penetrated the mainstream consciousness during the 2017 bull run. Its youth means that there’s a lot still growing and developing, like a gawky teenager growing into their unwieldy body.
Think about the way that crypto is being used. This is changing everyday – whether it’s in transactions for goods and services, as a store of value, or as a form of share in a company. The rise of DeFi over the past year has also introduced a wealth of other applications, from lending to saving. This makes it hard to pin down and again we circle back to the issue of definitions. With cryptocurrency’s actual application still up in the air, it’s understandable that tax bodies have a hard time categorising it. Furthermore, different cryptocurrencies were built with different applications in mind, so it may be that attempts at a one-size-fits-all approach are simply doomed to fail regardless.
The technology underpinning Bitcoin is also constantly being in development and changing rapidly. This further means any guidance issued has the unfortunate habit of quickly becoming irrelevant. Peter Brewin, a tax partner at PwC Hong Kong and a report contributor, told Cointelegraph that, “What our research shows is that the guidance issued by many tax authorities is already getting dated. Yes, it is important that people know how to account for tax on the trading of Bitcoin and other cryptocurrencies, but that is really crypto tax 101.” He points to the lack of taxation guidelines PwC surveyed when it comes to crypto borrowing and lending, decentralised finance, non-fungible tokens, tokenized assets and staking income.
Brewin believes that the solution, which he notes is currently “lacking in nearly all jurisdictions,” is “principles-based guidance that is fit for the new decentralised economy.” This is a question for the tax bodies themselves though, not traders and investors. Lacking this, you simply need to be aware of the rules in your region and stay on top of changes and how they apply to you.
What you can do
We spoke to Dan Howitt CEO at Recap, a cryptocurrency tax platform which makes it easy to calculate your taxes in minutes. Howitt believes the biggest problem in calculating your taxes is sourcing all of your transactions, explaining that “if you can get all of your transaction history in one place, you have the data to proactively manage your taxes. In 2017, it took me 40 hours to source all of my transactions, get them into a standardised format.”
Recap removes this pain by automatically fetching your transaction history, crunching the capital gains numbers and giving you a tax report you can share with your accountant or upload to your self-assessment tax return. You can get 20% off their services with the code LUNO-TO-THE-MOON (Recap is only available in a limited number of countries).
For those that want to go it alone, keep these things in mind…
Get a head start by preparing now
Thinking about the next tax season right after the last one isn’t much fun. We know that and we know you might want to put it off until you have to deal with it. January sure feels like a long way away.
But you can be kind to your future self by taking a few simple steps now to save time and make next tax season as painless as possible. Mentally prepare.
If you’ve profited from investing, the idea of giving up some of your profits might be painful – so prepare for that.
If you think you’ll need to pay capital gains tax on your investments, ensure you have enough money saved.
This should be a priority. Start keeping records of taxable transactions, especially if you run a VAT eligible business. Keep relevant receipts and, if you sell any bitcoin, keep a record of the profit at the time.
Look for an experienced accountant
We recommend consulting a professional. If you already have an accountant, talk to them about their suggestions. Accountants with Bitcoin experience may be in high demand, so consider finding one now.
Stay up to date with announcements
The guidelines might change any time.
Getting it right
There’s been significant work done in recent years to provide guidance for the taxation of digital assets, but tax bodies are always going to find it hard to stay completely up-to-date with developments. Bitcoin is different to anything that has come before and is constantly changing. As a result, businesses will continue to be faced with tax uncertainty, creating further challenges for adoption and innovation.
What we can see, though, is that authorities are certainly conscious of the fact that new crypto taxation guidelines are necessary. There's a growing understanding that policymakers need to collaborate with industry players to help them understand the complexity and ever-changing nature of crypto. In the past, we’ve worked alongside regulatory bodies and tax authorities to provide them with insight. We’re in favour of sensible regulation and strongly oppose the use of digital currencies for anything illegal. Weak and unclear tax regimes open the doors for this kind of behaviour, so it’s in all of our interests to get it right.