2018 could go down as the most dramatic year within the Crypto space and not for the right reasons. Coming from ATH’s in 2017 and early 2018, a significant plunge for the better part of this year has seen sentiment for the new asset class struggle. However, we have seen a great deal of growth in the industry and it’s no wonder governments are taking serious note of Cryptocurrencies as a source of revenue through taxation.
While there is no global consensus on the classification of Digital Assets as an emerging asset class, there is a general implication that Cryptocurrencies fall within the definitions of ‘resources with economic benefits’. Worthwhile to note, there are groups that oppose this, suggesting that Cryptocurrencies do not fall anywhere near traditional finance definitions.
Without a clear definition of what Cryptocurrencies are, countries have been left to enforce taxation laws subject to own considerations. As a section of stakeholders lobby for the creation of separate legislation for bitcoin tax laws unique to their status, the taxation model across countries revolve around the two uses of Crypto; Crypto as payment medium and an investment.
Cryptos, mostly Bitcoin, are accepted by a number of entities as a means of payment. The entities can either be individual private citizens or companies. This sort of usage and parties involved forms the first two categories of taxation in form of Income Tax for transactions carried out by individuals and Company tax for payments drawn in favor of companies. For both tax categories, tax liabilities are incurred when cryptos are used to settle payments for goods and services.
Cryptos as investments
Ever since Satoshi anonymously released the Bitcoin code and the subsequent creation of altcoins in their thousands, Cryptos have been viewed as investments. This is achieved through buying of digitals assets for Hodling or trade. Hodling is the act of holding on to assets with the hope of selling at a later date once prices appreciate. The skyrocketing Bitcoin prices hitting an all-time high of $20000 in 2017 keeps speculators and hodlers bullish with the expectations that Bitcoin prices will rise again. All profits realized from this activity are subject to Capital Gains Tax.
Trading, on the other hand, is more of a day to day, minute to minute buying and selling of cryptos on trading platforms. Profits from trading can be considered as revenue, thus liable to Income Tax, or Capital gains liable to Capital Gains Tax.
Implications to users
In countries where Cryptocurrencies are taxable, it is important for users to be aware of the models used and be informed on general tax requirements. Just like in fiat economy, failure to comply with crypto tax regulations can attract huge fines and penalties. Key in this process is transaction records from the likes of crypto trading exchanges. Users should keep proper records with attention and detail to buy and sale date, the value of fiat equivalent at the time of buying & sale as well as proceeds from sale. This makes it easy to file tax returns and efficiently minimize tax liability.
Minimizing of tax costs
Businesses operate with the sole aim of making the highest profits as the lowest possible costs. In this case, cutting down on taxation costs could significantly mean a lot. There are a number of ways of meeting this. Note, however, they are different from tax evasion – which is a criminal practice common to both fiat and Crypto.
Engage Crypto tax platforms or accountants
Keeping records and filing tax returns can be pretty easy for small transactions. It may not be the same for high volume transactions. As such, it is better to use Crypto tax services and software. Other than helping sort out heavy data, Crypto tax accountants are more conversant with taxation laws and are able to identify tax exemptions which can save a lot of money.
Operating in tax-free territories
Some countries do not tax crypto by the mere fact that Cryptos operate within legal grey areas and do not have laws dictating their usage. Others take deliberate steps to offer ‘no tax’ on all Crypto activities while some pass off tax by virtue of how they define Cryptos. Germany is one such country as it considers Cryptos ‘private money’ and are not subject to tax. Businesses can take advantage of these territories to run successful businesses.
Borrow against Crypto
Cashing out is what attracts tax. In the same vein, long-term investments get a tax reduction. Today, Crypto holders can access crypto backed loans by using their assets as collateral. It would be a good idea to liquidate through loans while still holding assets to cut on tax costs.
As discussed above, taxation laws are particular to each country. In the US for instance, Digital Assets are recognized as property and are taxed similarly to the bonds and stocks. The UK relies on the International Financial Reporting Standards (IFRS) laws which pundits use to squeeze Cryptos at Intangible assets and inventories using the IFRS outline. Attempts at compilation on general info on global Crypto taxes are available online.
Note: This is a guest post and author has shared his opinions on the subject, this by no means is a financial advise and readers should do their own research before making any financial decisions.