Since the introduction of bitcoin and other cryptocurrencies, governments and financial authorities have had different opinions on how best to handle digital assets. Some took to the new technology with open arms, while others met them with caution and some even banning their use.
Currently, most jurisdictions do not cater for digital currencies with their own regulation. The absence of such legal frameworks means many authorities are still grappling around on matters of cryptocurrency.
Even so, some governments have taken initiatives to create the required rules to govern the usage of crypto.
Despite there being different approaches to what cryptos represent, the majority of jurisdictions seem to agree on one thing; bitcoin and other cryptocurrencies should be regulated. A key aspect of these regulations is crypto taxation.
Why tax bitcoin?
Cryptos by their inherent nature serve lovers of privacy better than they do fiat. Decentralization and absence of governmental influence make them the go-to means for trade. This attracts malicious individuals and unfortunately, creates the notion that Cryptos facilitate crime. Cases of money laundering, funding of terrorist and fraud activities have been linked to Cryptocurrencies. Thus, there has been an urgent need for regulations to streamline activities in the largely novel industry. Today, several countries demand strong Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance for Crypto projects – taxation also complements these requirements.
Since bitcoin is a new concept, developing guidelines that provide for taxation continues to prove a challenge. Even the movers in financial matters such as the American Securities Exchange Commission (SEC) and the European International Financial Reporting Standards (IFRS) are yet to come up with a fixed definition on the status of Crypto.
This leaves countries to go by their own definitions to set the rules such as cryptocurrency tax UK, and how HMRC intend to govern these rules. The United States and other Jurisdictions have termed cryptocurrencies as ‘assets’ as opposed to ‘currency’ given that Cryptos are not legal tender. This definition helps the Internal Revenue Service (IRS) come up with guidelines to tax Crypto.
Irrespective of the tax model, it is important that Crypto owners keep proper records of their transactions. Generally, bitcoin taxation follows information on user bitcoin finance. This means taxable profits are generated from financial statements whose records play a vital role in reconciling returns. Properly kept accounts eases the filing process and ensures correct taxation is done.
Users can personally keep entries on Buy and sell dates, exchange rates at the time of buy/sell and profits/loses realized from the sale. Alternatively, and highly recommended for huge volume transactions, users can employ the use of tax software or involve expert tax accountants.
Tax on mining
Bitcoin Mining as a process of releasing Cryptocurrencies into the ecosystem equally does not have a consensus on its taxation. Users involved in mining or running masternodes are usually rewarded in a given number of Crypto for every block mined. Germany considers it a ‘voluntary service’ and does not impose any tax liabilities. The UK, on the other hand, imposes a 20% levy on mining. The US also has in place mechanisms to tax Cryptos acquired through mining. The reasoning behind this is that there is an aspect of ‘receiving’ in a similar manner as in payment. All payments in crypto are subject to Income tax.
Tax on bought Crypto
Due to appreciating Crypto value, users buy them as a form of investment. They can either be traded immediately on trading platforms or held for future sell with prospects of profits gain. In this scenario, the UK imposes a tax on all gains in what is referred to as Capital Gain Tax.
Profits from trading, which involve quick cashing out, can be treated as revenue. When recognized as such, they attract Income tax liability. Holding Cryptos for longer durations calls strictly for Capital gain taxes. They are further divided into two; short-term capital gains and long-term capital gains. Short-term capital gains incur higher taxes than their long-term counterparts. Many governments offer this incentive to encourage long-term investments. Holding Crypto for very long periods could however minimize gains due to high volatility. Germany does not tax Capital Gains of whatever value in the first year. On the second year forward, they tax asset holdings exceeding 600 Euros.
Crypto owner’s obligations
Since cryptocurrencies are assets, all crypto owners have a duty to report their taxable crypto involvement of whatever scale. Failure to do so contravenes regulatory compliance and attracts fines and penalties or even jail time.