Could this be the year the world gets serious about cryptocurrency taxation? The coronavirus pandemic, after all, could cost the global economy as much as $4.1 trillion — or almost 5% of global gross domestic product — according to the Asian Development Bank. Governments will soon be looking to tap all possible income sources to balance their budgets, including crypto, say tax experts.
“At some point, somebody is going to have to pick up the bill” for the COVID-19 pandemic and its associated economic stimulus packages, Peter Brewin, a PwC tax partner in Hong Kong, told Cointelegraph, adding: “We can expect revenue authorities to be under pressure to collect more taxes. I see no reason to believe that cryptocurrencies will be immune to this.”
In tune with this, on April 1, the Spanish tax authority began sending out warning notices to 66,000 cryptocurrency holders to remind them of their tax obligations, as Cointelegraph reported. “It’s the Willie Sutton question,” Richard Ainsworth, an adjunct instructor at Boston University’s School of Law, told Cointelegraph. “Why do you rob banks? It’s where the money is. Clearly, untaxed money is in crypto. There will be activity, and it will be significant.”
Paul Beecy, a tax services partner at Grant Thornton, told Cointelegraph that there is heightened awareness of cryptocurrency now in much of the world, and more attention is likely to be directed toward taxing Bitcoin (BTC) and other cryptocurrencies this year.
But not everyone concurs. “The IRS and other agencies around the world will be stretched thin with the ‘direct’ tax fallout resulting from the pandemic, like administering relief programs,” Omri Marian, a professor of law at the University of California, Irvine, told Cointelegraph, adding that there isn’t enough revenue to be collected from crypto assets to make them a major priority for tax agencies. “I expect tax enforcement in the context of crypto assets to be about the same, or lower, going forward.”
The crypto taxation challenge
Cryptocurrency taxation has long been problematic. An individual in the United States, for example, may have to pay a capital gains tax when purchasing a single cup of coffee with BTC. The U.S., however, isn’t unique in this regard. Grant Thornton’s Beecy regularly asks his non-U.S. colleagues about their country’s treatment of Bitcoin purchases. Most, like in the U.S., have to keep track of every purchase (at least in theory), including cups of coffee.
“Yes, it’s a taxable disposition. Germany is an exception: Under rule 23 EStG, Germans can trade crypto tax-free — provided that their capital gains do not exceed a total of 600 euros per year,” he told Cointelegraph. Germans pay no capital gains at all if the crypto is held for more than one year.
According to Brewin: “Most countries do not have specific tax laws for cryptocurrencies. Instead, they try to fit the taxation of crypto assets into existing tax laws and many have started to issue guidance on how they interpret existing laws.” One problem here is that it has led to inconsistent treatment around the world.
Three tax structures
Brewin breaks it down into three basic tax regimens in different global jurisdictions. Individual residents in Group 1 jurisdictions such as the U.S. and the United Kingdom (by far the largest) should almost certainly keep records on all of their crypto spending and may have to pay taxes on any gains they make when they use their crypto to buy goods or services. These countries apply a broad-based capital gains tax, and Brewin believes that “it’s very unlikely that such jurisdictions are going to make changes to their capital gains tax regimes to exempt crypto assets.”
Group 2 residents — e.g., Hong Kong, Singapore — enjoy an advantage over those in Group1, as those jurisdictions do not levy taxes on capital gains. Therefore, there is no need to keep records of or calculate tax on their gains/losses with regard to crypto spending “as long as they are not deemed to be in a business of trading in cryptocurrency,” said Brewin.
Group 3 jurisdictions like Portugal and Malta do not require taxes to be paid, but this could change, depending on whether the current treatment has arisen by accident (i.e., the rules just haven’t been updated fast enough to include crypto) or by design — that is, an explicit government policy decision to exclude the asset class.
For Group 3, crypto could be subject to future legislative actions — particularly if governments are looking to raise income in a post-COVID-19 world, observed Brewin, adding: “The tax treatment may differ depending on the type of asset — e.g., securities tokens may be treated differently from payment tokens like Bitcoin.”
“Not the best outcome for the tax guy”
“Crypto has special attributes that make taxing it very difficult,” said Ainsworth, adding that, for instance, it’s often difficult to attach names to transactions. Taxing cryptocurrency primarily through an income tax — as opposed to a sales tax, or VAT — leads one inevitably to a property tax/capital gains outcome.
“So, David Hedqvist who just buys Bitcoins low (for Swedish Crowns) and sells Bitcoins high (for Swedish Crowns) has no VAT liability, just income tax,” Ainsworth explained, referencing the judgment in the Skatteverket v. Hedqvist case in the European Court of Justice and elaborating:
“That’s not the best outcome for the tax guy because we can find the transactions much more easily than we can find the people behind them. The further trouble with the income tax is that we get most compliance from the withholding (and third-party reporting) systems. It’s really not a ‘voluntary compliance’ system. We comply because the government knows about us.”
The whole idea of crypto, though, is that ownership is (semi) anonymous, which tends to neutralize the withholding and reporting systems, continued Ainsworth, who was the former deputy director of the International Tax Program at Harvard Law School. He added: “Unless we want to spend a lot of enforcement resources connecting people to crypto, we are really not going to get anywhere fast.”
Ainsworth suggested, instead, to demand a withholding (per crypto transaction) from the cryptocurrency exchanges because then “it would not matter who was engaged in the transaction, or what was involved in the transaction, just that there would be a charge (tax) involved in each transaction collected and reported by the exchange. The charge would be a flat percentage.”
The Portuguese alternative
If crypto taxation is unwieldy, inconsistent and difficult to enforce in most jurisdictions, are there still places that are getting it right? In Portugal, for instance, individual crypto trades are not taxed — just trades from professional activities, that is, if trading crypto is a core business. Is this a better model?
Related: No Tax for You: Why Crypto Traders and Miners Might Head to Portugal
The Portuguese way probably isn’t applicable to the U.S., suggested Beecy. With regard to Bitcoin, for instance, “the IRS has already given guidance: This is property and it is subject to taxation.” Is the government suddenly going to change gears — and exclude an entire asset class from taxation? That would be politically explosive, he suggested.
In most countries, tax outcomes for crypto assets are just a result of applying regular tax laws, said Marian. Most do not have a tax policy specifically designed for crypto assets, as appears to be the case in Portugal. “The only countries that I am aware of that designed specific lenient crypto assets tax policies are all traditional tax havens, and this tells you all you need to know.”
What’s the endpoint?
Where, then, is the world likely to end up with regard to cryptocurrency taxation — if it is even possible to generalize? Beecy expects to see in the U.S., and maybe other nations, a bifurcated tax scheme with a split between digital investors and digital consumers. The former will be subject to fairly onerous reporting requirements, but they will be assisted by software packages that automatically track and consolidate an investor’s transactional information — often linked to a digital wallet. The investor would have access to all buys, sells, gains, losses, as well as consolidated monthly reports and annual reports, “just like the typical brokerage accounts.”
Meanwhile, digital consumers will increasingly purchase everyday goods and services with stablecoins, which, while taxable in theory, basically have no gains or losses to compute. Crypto transactions — purchasing a shirt or a slice of pizza — will be fairly frictionless. Mazhar Wani, a PwC tax partner in San Francisco, agreed that stablecoins could play a role, telling Cointelegraph:
“In the context of taxes, the key problem with using crypto assets for day-to-day spending lies in its volatility compared with the local currency. The obvious solution is adoption of a digital currency that doesn’t exhibit this volatility versus local fiat currency — some form of stablecoin.”
Wani would like to see jurisdictions start viewing crypto and digital assets through a fresh lens — i.e., not as a property, currency, security or commodity — with an end toward “establishing one globally consistent policy and framework around it with some sort of de minimis exceptions to be established locally to minimize burdensome compliance, reporting and enforcement activities.”
A role for the United Nations?
A more idealistic proposal was developed recently by Ainsworth and Tony Hu, a graduate student at New York University’s tax law program, in a working paper where they call for a supranational and trusted body like the United Nations to administer tax revenues raised by a transaction tax on exchanges. As Hu told Cointelegraph:
“For example, when a jurisdiction is battling opioid pandemic, a plight typically associated with cryptocurrency, it could apply to the administering body [e.g., the U.N.] for appropriate funds proportionate to the crisis’s scale and severity and use the funds to reduce instances of overdosing and develop more advanced technology to detect opioids at port of entry.”
A supranational solution? “I think that’s aspirational,” commented Beecy. “I understand it, but the challenge is: Will nations give up their sovereignty?” This would mean that countries would have to relinquish their prerogative to tax the property of their citizens. Brewin, too, believes that most countries will strive to retain all their tax privileges, and he doesn’t foresee much global convergence on how crypto is taxed. The exception may be with respect to information reporting:
“I’d be very surprised if we don’t start to see tax authorities cooperating to require more disclosure from exchanges, custodians or wallet providers on their customers and then sharing this information with each other — for example via expanded applications of the common reporting standard.”
Beecy can see groups of central banks, like those in the European Union, developing cohesive policies to facilitate cross border digital currency transactions. But a crypto transaction tax with proceeds going to the U.N. to fight pandemics or the like? “I think that’s just a bridge too far,” he told Cointelegraph.