Governments are grappling, trying to figure out how to deal with cryptocurrencies. But if there is something they are not taking chances with, it is crypto taxation. So should you. The consequences of failure to pay taxes are always far reaching. It is much worse for people fumbling with regulations that are not so clearly set out.
There are still many countries where cryptocurrencies are not taxed. Nevertheless, it is safe to always look out for what’s happening in the regulation space. Currently, countries taxing crypto choose to apply local taxation rules on digital assets. While the crypto community has been championing for separate bitcoin tax rules, the consideration seems to be taking a long time coming.
The constant in the impasse is that since most cryptocurrencies have a global nature, there has not been a consensus on how to define them. So countries take their own definition and apply their own tax laws. The US considers crypto ‘property’ for tax purposes. On the other hand, the UK prefers to treat them according to their use, having categorized crypto assets to; ‘Exchange’, ‘Utility’ and ‘Security Tokens.’ Meanwhile, down in South Africa, cryptocurrencies are treated as ‘assets of intangible nature.’
Of the three countries, the UK has an elaborate crypto tax guideline. With a more defined and a much more extensive guidance, it is easier to file crypto tax returns in the UK. The US guideline, in the format of Q & A addressing Frequently Asked Questions, is quite complex to follow through. Compared to the US brief, the South African brief is a bit straight forward although very scanty.
Still, no matter the different definitions attached and approach to cryptos per jurisdiction, crypto tax laws do not differ much. As digital assets are taxed alongside other asset classes in the financial markets, the general tax obligations are Income Tax and Capital Gains Tax.
Income Tax
This is tax imposed on revenues received by individuals. The minimum amount taxed differs from country to country and generally pertains to monies received by citizens from productive engagements. This mostly constitutes salaries and payments for services. Therefore, anything equivalent to a salary in terms of digital assets, fall under Income Tax. In the UK, mining rewards and airdrops are considered salaries, thus subject to Income Tax.
Capital Gains Tax
Capital Gains are basically the profits one receives when selling off an investment or trading. Events involving disposal are usually taxable and the tax attached to them are referred to as Capital Gains Tax. As a result, any act of selling or exchange of crypto becomes a taxable event. This includes cashing out into fiat, exchanging crypto for crypto or giving it out to someone who is not considered a close relation. Traditional assets transferred to close relations are not taxed, the same applies to crypto.
Whether a user buys crypto for trade for profit, or receives crypto as pay then exchanges them for fiat at a later date, if there is any gain realized, CGT is imposed.
The UK treats Capital gains of different durations equally. The US on the other hand categorizes them into short and long-term. Cryptos that are purchased or received and traded within a year are considered short-term gains and attract short-term CGT. Similarly, crypto held beyond a year are taxed on long-term Capital Gains frameworks. The consequence of this is that short-term holders receive higher tax liabilities than their long-term counterparts.
Tax reporting
Since cryptos do not have central control, governments rely on individuals to self-report on crypto activities that attract tax. The US is said to have previously used exchanges to track crypto users and sent demands on compliance with their tax obligations. South Africa, whose CGT approach borrows heavily from that of the US, also plans to use exchanges to monitor crypto users and ensure they comply with the law.
Proper reporting of tax is beneficial to the individual as it helps avert penalties or even jail time, as well as helping take advantage of tax reliefs. Usually, one needs to keep records of all transactions made in crypto paying particular attention to; Date and price at buy and sale, the fiat equivalent at buy and sale, as well as profits and loses realized.
US based crypto exchange Coinbase, provides tax forms for customers who receive $20,000 and above in virtual assets sale in at least 200 transactions in a calendar year. This however is not reported to the IRS.
If a crypto user is not able to painstakingly make each record entry, there are several online platforms that offer tax reporting services. The UK has a ‘tax pool’ feature that helps ease tracking of transactions.