2020 Tax Laws: How Governments Regulate Cryptocurrency

It’s no secret I completely missed the mark with hitting my goal of writing 52 blogs in 52 weeks. It’s been a while since I’ve posted any content, which is why I wanted to release my first piece of content in six moths with a topic I know many of you are interested in, cryptocurrency. This isn’t like any other content you’ve seen me post before. It’s 100% thorough and 100% unique.

I decided to find someone much smarter than myself to cover this topic. I’m far from a crypto expert, but I do believe it will play a major part in global finance moving forward and as an investor we should all be watching, if not investing, in some sort of cryptocurrency.

Author of this guest-blog is cryptocurrency expert, Mary Ann Callahan, Marketing Manager of CEX.IO. Mary Ann did a hell of a job explaining all the various global tax laws that we should be aware of moving forward when it comes to cryptocurrency.

Tax Laws: How Governments Regulate Cryptocurrency

2019 has seen some very interesting changes in the cryptocurrency world. Long gone are the days of speculation and hype, making way for a more level-headed, sensible approach to crypto investing

All major cryptos have dropped in value since the all-time high in December 2017. The concern was that the prices would continue to decrease; now they have stabilized and the outlook is brighter. One thing that huge surge in value did predicate was the keen interest of governments and tax offices around the world. They saw large fortunes being made and little in the way of instruments to tax people on their huge profits. Below we outline the tax laws of the 6 major jurisdictions.

Cryptocurrency in The United States of America

The US has a very convoluted way of dealing with tax in general (both state and national taxes), and the same is definitely true when individuals deal with cryptocurrency. Under the US legislation, all dealings in cryptocurrency are subject to taxation - that is whether you buy, sell or even use the currency for purchases. Enforcing that robust measure is challenging, especially when the IRS (Inland Revenue Service) rely on full disclosure of information from individuals in order to ascertain and verify their bill.

Types of Crypto Tax

The way in which the currency is taxed is also a little complex. Cryptocurrency falls under the category of a property asset along with stocks, bonds and other investment instruments. If you buy at one price and sell at a higher price, then tax is levied on the differences in value. Taxes such as sales tax (when making purchases) are also levied. 

It is worth noting that if you’re gifted fork coins which normally have a zero value at the time of the fork, and those coins later have a value such as in the case of Bitcoin Cash, a tax will be due on the difference in those values too. It becomes even more complicated if you’re exchanging cryptocurrency for labor and services as other company taxes and income tax come into play.

It is best to make a completely honest filing each and every year to the IRS as they do work within the crypto community to track funds and trace individuals who are evading tax by not declaring crypto assets.

Cryptocurrency in The United Kingdom

The UK operates a simpler approach to crypto taxation. Here, cryptocurrency is classed as a capital asset (investment), and then any difference in value between purchase and sale is subject to capital gains tax. Most sales tax or VAT has to meet the minimum thresholds before it is chargeable. Crypto vendors would be VAT exempt providing they meet the criteria.

Any work carried out in return for cryptocurrency is taxable. It is declared at the end of the tax year alongside other earnings and would be subject to income tax. HMRC (Her Majesty’s Revenue and Customs) do try to ascertain information about individuals that trade in crypto, but their resources aren’t comparable to the IRS, who spends a fortune each year tracking down crypto investors. 

With Brexit looming and the success of cryptocurrencies, it might be that HMRC does take a zero-tolerance approach like their US counterparts. So, it is always advisable to declare all crypto stock you hold. There are lots of minimum thresholds in the UK so many investors don’t owe any tax after declaring their cryptocurrency as it doesn’t exceed the taxable value.

The European Union

If you thought the US or UK approach to crypto taxation was complex, then you’re in for a treat with the EU. Member states all have different (regional) taxation laws and some legislate to tax cryptocurrencies where others don’t. Confusing that matter further, some member states view cryptocurrency as an investment instrument, while others treat it as ordinary currency. This means while some countries are taxing on profits of trading, others are taxing on ownership, income and sales.

The EU allows member states to decide how to treat taxation and what legislation they want to put in place. Some countries will levy VAT on crypto transactions (though there is no specific EU legislation for VAT being charged on crypto), while other countries won’t.

Because of the complex nature of taxation within the EU, it is best to check with your local tax office whether your cryptocurrency is taxable.

Cryptocurrency in Japan

In the east, Japan is trendsetting in the adoption of some cryptocurrencies and legislating to prevent others. Coins like Bitcoin are hugely popular in the Japanese market, and taxation is relatively simple in Japan. Investors must declare cryptocurrency on their tax returns each year under other income (miscellaneous income) and are then taxed according to their individual tax rate.

The rates range according to total income and can be as little as 15% up to 55%. Some currencies that are anonymous (such as Zcash) are being cracked down on by the Japanese financial regulator with the view to making those tokens illegal. This hasn’t happened yet, but it is expected in the near future. 

Japan is actually proposing tax benefits for crypto investors of major currencies such as Ether and Bitcoin, which is very progressive compared to our next entry.

Cryptocurrency in Russia and China

Russia has a very odd relationship with crypto. It is generally considered not to be legal to accept crypto payments and is also considered a surrogate currency, which again makes its legal status questionable. The Russian tax authorities do tax cryptocurrency however and look to tighten legislation around taxation. It is advisable to be very aware of the law if trading crypto in Russia.

In China there is no taxation on cryptocurrency as it is strictly illegal to trade cryptocurrency. With severe punishments in place and authorities actively chasing crypto enterprises and individuals, it is not worth trading in China.

A Changed Landscape - Serious Cryptocurrency Investment Opportunities

In many ways, cryptocurrency has grown up. Serious investors are viewing the more stable pricing as a means to diversify their portfolios. With crypto projects continuing to introduce new and intelligent approaches to life, these investments have a lot of promise.

Being grown up isn’t all fun though - this means stricter regulation and taxation. A set of tighter measures has been introduced since 2017 to reel in the taxes that are due on such investments. Now many of the cryptocurrency exchanges work alongside government bodies to ensure that business is conducted legitimately.

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