Cryptocurrency was developed as a new payment method that used a cryptographic system with decentralisation as its main characteristic. As its main characteristic was decentralisation without having a financial institution behind it, it allowed for international transactions. The decentralised and anonymous nature of crypto has challenged many governments on how to allow legal use while preventing criminal transactions. Many countries are still analysing ways to regulate crypto, and in many parts of the world it remains a legal grey area.

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What is Crypto?

The definition of crypto is an interesting one, as many countries define crypto differently, although there seems some common consensus in broader lines. Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralised technology spread across many computers that manages and records transactions. Part of the appeal of this technology is its security.¹

The definition of crypto from a legal perspective has strong influence on the taxation of crypto.

Is Crypto Legal?

In a number of countries around the world, such as the US and Australia, it is not recognised as a currency, but rather as an investment asset. In countries such as Russia or China, crypto is illegal, but in other countries the treatment is quite liberal, such as in Finland where it is VAT exempt. In Russia, digital currency is not recognised as a legal tender for payments, and the Russian rubble remains the only official monetary unit.² China does not recognise cryptocurrencies as legal tender and the banking system is not accepting cryptocurrencies or providing relevant services; however, China’s central bank is reportedly considering issuing its own digital currency.³

In other countries, Crypto is legal, but not recognised as a currency. In Japan however, on 1 July 2017, bitcoin and other digital currency were officially recognised as legal money. At the time of writing, Japan is the only country in the world that recognises it as a currency, and has the most liberal laws related to Crypto.

How is Crypto Taxed?

How Crypto is taxed greatly depends on the legal definition of the digital currency in the country in question, as well as the tax system utilised in the particular country. Some countries use a wealth tax instead of CGT, others use both or income tax, and yet others use either income tax or Capital Gains Tax (CGT), but no wealth tax.

United States

In the US, Crypto is seen as property, which attracts CGT when disposed of. In Notice 2014-21 the IRS stated:

“The Internal Revenue Service (IRS) is aware that “virtual currency” may be used to pay for goods or services, or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.
(...)
… the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.”

The Federal tax rate on cryptocurrency capital gains ranges from 0% to 37% (FY2020). When crypto is bought, the purchase price should be recorded. This is the cost base of the crypto asset. When the crypto is disposed of, the disposal price is the selling price. The selling price minus the cost base is the capital gain. Taxpayers will be required to determine the fair market value of virtual currency in US dollars as of the date of payment or receipt.

Any gains or losses made from a crypto asset held less than 12 months are taxed at the upper marginal tax bracket in which your taxable income falls. Any losses can be used to offset income tax by a maximum of USD $3,000. Any further losses can be carried forward.

If the crypto was held in excess of 12 months (a long term capital gain)⁴, then the applicable tax rate is much lower, and is either 0%, 15% or 20%, depending on individual or combined marital income.⁵

Australia

Much like the US, Australia defines crypto either as an asset, which attracts CGT when disposed of, or as trading stock, when it takes the nature of a business activity to buy and sell crypto. If the latter occurs, trading does not attract CGT, but rather the business trading rules would apply.

If cryptocurrency is held for sale or exchange in the ordinary course of business, the trading stock rules apply, and not the CGT rules. Proceeds from the sale of cryptocurrency held as trading stock in a business are ordinary income, and the cost of acquiring cryptocurrency held as trading stock is deductible.⁶

If the CGT rules apply, crypto that has been held in excess of 12 months by an Australian tax resident qualifies for the 50% CGT discount.⁷ This essentially means that 50% of the net gain is shielded from taxation. Where crypto has been disposed of, but not withdrawn from a crypto wallet, it will still attract a CGT event. Instead of the actual sales value, we will then take the AUD market value of the crypto on the day of the disposal.⁸

United Kingdom

In the UK, the HMRC has issued a manual in relation to crypto. This manual concerns the tax treatment of crypto assets.⁹ For individuals, it states that Crypto assets as a personal investment, usually for capital appreciation or to make particular purchases, may attract CGT when they dispose of their crypto assets. Like in Australia, there may be cases where the individual is running a business which is carrying on a financial trade in Crypto assets. In this case taxable trading profits arise, and the income tax rules would take priority over the CGT rules.

Canada

Much like the other Commonwealth countries, in Canada Crypto either attracts CGT or income tax, depending on the nature of the trading activities. If it is business income, then 100% of the income is taxed, whereas with capital gains only 50% is taxed.¹⁰

Netherlands

The Dutch tax system is a bit different from that in the Commonwealth countries. It utilises a wealth tax, and does not tax capital gains. Rather, in the Netherlands, a deemed interest is imposed on the value of all assets minus all liabilities as per the start of the tax year (with the exception of the main residence, business income from sole trader businesses and major shareholdings in companies larger than 5%). The deemed interest is taxable against a flat rate of 31% (in 2021, 30% in 2020). You can read more about crypto in the Netherlands here.

Germany

Germany has been deemed a “crypto tax haven” as it does not recognise crypto as monetary currency, commodities, or stocks. Instead, Crpyto is considered private money. This distinction is important since private sales bring tax benefits in Germany. Private sales that do not exceed €600 are tax exempted.¹¹

Finland

The definition of virtual currency in the Finnish Act on Virtual Currency Providers¹² provides:

“For the purposes of this Act, the meaning of the term virtual currency refers to a value in a computer-coded digital format

a. for which no central bank or other public authority has been the issuer, and which is not legal tender as a means of payment;

b. with which a person can settle a liability i.e. pay up the liability; and

c. which can be electronically transferred, electronically saved, and electronically exchanged.” ¹³

According to a Supreme Administrative Court ruling, the correct treatment of virtual currencies is that they are assets.¹⁴ This means that the tax rules on capital gains are applicable.

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TAXABLY

As you can see, most countries mentioned in this blog consider Crypto currencies as property or an asset, which attracts capital gains on disposal. As many countries are exchanging information on income and assets with other countries, holding foreign Crypto can cause income tax or capital gains tax implications in the country where you ordinarily reside.

At Taxably we have a multijurisdiction team of senior tax practitioners with many years of experience. We frequently assist our clients with their crypto and other investments. If you require assistance with your digital currency, you can contact us through the contact form on our website.