Cryptocurrency taxation has long been the subject of heated debate within the crypto community. Even though right now crypto is in the middle of a bear market, the total market cap still exceeds US$100 billion. With such numbers, it is no surprise that state authorities are seeking to urgently claw back control over funds that have up by and large eluded them.
Confusingly, despite numerous international meetings and forums, there is still no unified approach to defining what cryptocurrencies are, and how countries can develop a common policy for taxing them. This is due partly to the anonymity of users, and partly to the ambition of virtual currencies to circumvent traditional financial institutions.
As of now, official regulation (even though in some cases convoluted) regarding cryptocurrency taxation exists in about 25% of countries (see the map above).
While each country is forging ahead in its own way, the differing taxation approaches can be divided into three main categories. The difference is due to what a country judges cryptocurrencies to be, which affects how a user’s actions when dealing with the currency is interpreted.
More than half of the early adopters of crypto regulations see virtual currencies as a source of personal or corporate income, taxing it similarly to money that comes from employment, production, and commerce. In most cases, earnings on mining or trading cryptocurrencies are defined as “other activity”. To be considered an income, a cryptocurrency transaction must be received as a form of payment for the purpose of making a profit.
The list of places that use income tax for cryptocurrencies includes the majority of EU states and some Latin American and Asian ones.
Below are the income tax rates for most of the crypto hot spots. Although the way cryptocurrencies are used has an affect on the type of tax and amount paid, this table at least provides a reference until a special standalone regime is introduced.
From this general overview, some tax-attractive jurisdictions regarding crypto activities emerge. These include Liechtenstein and three Eastern European states — Romania, Hungary and Lithuania — all of which have simple and lucrative flat income tax rates, both for individuals and organizations. There is no accumulation of federal and local taxes, no confusing progressive rates, and no complications with regard to wealth and oversees earnings.
That’s great news for crypto investors and traders in these countries.
The second most popular approach towards crypto earnings for tax purposes is to treat profits as capital gains. The idea behind this choice is that cryptocurrencies are normally acquired for holding or trading, similar to stocks, bonds, real estate, and other forms of personal property. As such, they can either appreciate or depreciate with time. Only if the cryptocurrencies are sold at a higher price than what they were initially bought for, is this activity deemed taxable as a capital gain.
As a rule, property and capital gains receive a more favorable tax treatment than income, sometimes even reaching tax exemption status (e.g. if the law does not categorize them).
The list below includes countries that use capital gains tax in relation to crypto.
A quick look at the table above shows another Eastern European standout in terms of the simplicity and attractiveness of its crypto taxation law. That country is Bulgaria. As early as 2014, Bulgaria’s official position has been that selling cryptocurrencies is comparable to selling any other financial assets. With this clear distinction made, a straightforward flat rate of 10% applies. There is no progressive taxation or any other extra charges.
Some countries don’t conform to the classifications above, either due to a particular definition of cryptocurrencies, or because of a mixed or controversial approach to dealing with them. Below are the top-5 noteworthy examples in this camp:
1. Singapore. If digital currencies are being traded, the profit is taxed, but if the profits are long-term investments, they are not subject to taxes. Traded as an investment, profits and losses in cryptocurrency are considered capital gains; but as a non-property type of capital gain, they are tax exempt.
2. Sweden. From the point of view of an individual, selling or exchanging cryptocurrencies triggers capital gains taxation. If they are held as stock, any gain is deemed as income from business operations. Mining is taxed either as employment income, or income from business operations.
3. UK. The UK interprets cryptocurrencies from the perspective of both income and capital gains. For instance, employees paid in virtual currency not only need to pay the personal income tax, but also the social security associated therein. If used for trading, they are treated as capital gains.
4. Austria. For taxation purposes, cryptocurrencies belong to the “other business assets” category within the list of activities subject to income tax (up to 55% — depending on the level of income). Companies operating in trading cryptocurrencies have to pay a 25% corporate income tax. However, if a distribution of profits takes place, the total tax rate (together with capital gains) is probably somewhere around 46%.
5. Greece. Even though the country is still on the way to embracing cryptocurrencies, it has defined that cryptocurrencies can be taxed in both ways, as capital gains and income. In case of companies, any business activity or capital gains derived from mining or trading virtual currencies triggers a 29% flat rate tax. In case of individuals, there is a split: capital gains are taxed at 15%, while personal income attracts rates from 22% to 45%.
Once again a tribute to Eastern Europe. Not set in any of the “camps” above, Belarus has drawn global attention as a crypto tax haven: income from mining and cryptocurrency operations are tax exempt until 2023. In addition, businesses such as cryptocurrency exchanges can benefit from an incredibly low 1% tax rate on their turnover until 2049, provided that they are running their operations in the High Technologies Park on the outskirts of the capital, Minsk.
The complexity of the national progressive systems of taxation, coupled with the time-consuming procedure of recording and calculating all gains and losses across the history of transactions, can be a real nightmare, unless automated. However, as soon as the sequence of actions and tax calculating formulas are set in place, everything can be automated with the application of Artificial Intelligence, and thus become a 1-click procedure.
One of the examples of the early adoption of this system is the Statement widget of ORS CryptoHound, which records the historic values of the held crypto assets, and generates bank-like statements, which can be referred to for filling in tax returns. Some further inter-application integrations could even fully automate the calculations and filing of all needed reporting info by the due date.
Cryptocurrency taxation is far from being universally agreed upon, however this is similar to normal taxation, which varies greatly from country to country.
Nonetheless, nearly ¼ of the world has pioneered some form of policy in this area, perceiving cryptocurrencies either as a source of income, or as an asset that generates capital gains.
While approaches differ and in most cases refer to already existing taxation systems, time will tell which approach proves to be the most efficient. It is only after this that a global role model will be set.
As of now, global leaders in crypto regulation (e.g. USA, Canada, Australia) have a rather complicated system of tax treatment, while some Eastern Europe states (Romania, Hungary, Lithuania, Belarus) are definite winners (depending on who you are) in terms of simplicity and attractive tax rates. At least for the time being…
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