Disclaimer: This article on cryptocurrency tax considerations for SMEs has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, financial, legal or accounting advice.
It can be challenging enough for small-medium enterprises (SMEs) to navigate through cryptocurrency tax requirements in jurisdictions where formal legislation has been enacted. But what about SMEs that operate in countries with a lack of formal crypto tax legislation? What tax obligations need to be considered on Bitcoin, Ether, and other altcoins? What actions must you take and what records need to be kept?
If you run an SME and own or use bitcoins (or any other cryptocurrencies) in business transactions and operate in a jurisdiction that currently does not have formal legislation, this post will provide some clarity. Of course, this should not be taken as professional advice but rather as a starter guide to implore you to take further action.
The reality is that a lack of regulation or what some term as regulatory greyness does not mean that your business is off the hook. Failing to prepare and record the right information could get you in a lot of trouble down the track. It is therefore essential to examine the tax implications on all types of income earned despite an absence of formal legislation. The main reasons for this are as follows –
- It’s your responsibility to file accurate taxes and keep necessary evidence.
- Any new tax provisions and new tax bills that are passed in the future may have an impact on you (this industry is new and developing).
- Tax authorities expect taxpayers to be proactive and disclose all necessary developments. If new regulations get passed, taxpayers who have disclosed all the required information may be exempt from severe penalties as a difference in treatment (if any) may be as a result of extensive study by tax authorities and professionals.
Here’s what you need to know.
Cryptocurrency tax consideration 1: What are you using the crypto for?
Payment and receipt of goods or services
If it is used as a medium of payment, you may be taxed on the gain from ‘disposing of’ the crypto. Let’s look at an example: Enterprise A, incorporated in the US and subject to tax by the IRS, bought 1 unit coin at $50 on 15 June 2016. A then uses 1 unit of the same coin to pay for an accounting tool subscription to Enterprise B on 31st June 2017, which costs $70. In this scenario, Enterprise A made a gain of $20 ($70-$50) due to the value appreciation of the coin. The gain of $20 will then be taxable under the capital gains tax.
Another example would be if Enterprise A bought 1 unit coin at $50 on 15 June 2016. Enterprise A then uses 1 unit of the same coin to pay for an accounting tool subscription to Enterprise B, which costs $40. In this scenario, Enterprise A made a loss of $10 ($40-$50) due to the value depreciation of the coin. This loss may be used to offset against Company profits if conditions are met.
At the same time, Enterprise B, the recipient, has to recognise this one coin at $70 as ordinary income (fair market value of the coin at the time of receipt) for tax purposes. A further consideration would be if the supply of the goods and services were a taxable supply. The business could claim input tax credits on the GST charged on the Bitcoin they received as payment.
If crypto is used as a medium of exchange, the treatment would be similar as if used for payments and receipt.
For businesses that have acquired Bitcoin or other altcoins as an investment (or converting to fiat currency), capital gains tax could apply. Once again the example above for the medium of payment may apply.
SMEs which acquire virtual currencies via mining activities should measure the income at the fair market value of the virtual currency as of the date of receipt (date the coin was successfully mined). This income is usually considered ordinary income. Any expenses incurred concerning the exchange service, including the acquisition of the coin for sale, are generally allowed as a deduction.
Initial coin offerings will produce ordinary income to businesses.
Cryptocurrency tax consideration 2: What type of enterprise?
In determining the kind of tax implication for the scenarios above, it is also critical to analyse the type of enterprise, for example, sole proprietor, self-employed, partnership, corporation, funds trust, etc. The tax implications and tax rates for each type of business vary.
Tax regulations in your jurisdiction
SMEs may face different tax implications on different types of transactions.
Capital Gains tax
A capital gains tax is a type of tax levied on capital gains, profits a person realises when he/she sells a capital asset for a price that is higher than the purchase price. Capital gains taxes are only triggered when an asset is realised, not while it is held by the owner.
That means he/she can own Bitcoin or other similar cryptocurrencies, for example, that appreciates or depreciates but does not owe a capital gains tax on it until it is sold. Short term or long-term capital gains would result in taxation at different rates, and different jurisdictions have varying rates of capital gains as well. In some jurisdictions, however, authorities do no tax on capital gains, such as Singapore and Hong Kong, Cayman Islands, etc.
Income tax (aka corporate tax)
Income taxes for SMEs are also known as corporate tax, corporation tax or company tax. Corporate tax is a direct tax imposed by a jurisdiction on the income or capital of a corporation. The tax rates imposed on corporations varies based on the jurisdiction. Furthermore, there are usually rebates against the chargeable income of a corporation and expenses that are deductible when arriving at the chargeable income of a corporation.
Goods and services tax
Goods and Services Tax (GST) or Value-Added Tax (VAT) is a broad-based consumption tax levied on the import of goods, as well as nearly all supplies of goods and services in a country.
GST/VAT should be due in the normal way from suppliers of any goods or services sold in exchange for Bitcoin or other cryptocurrencies.
Cryptocurrency tax consideration 3: Records to be kept
As references or supporting documents for tax filing, it is good practice to keep records of:
- the date and time of the transactions.
- the amount in local currency or preferred currency (which can be taken from a reputable online exchange).
- the purpose of the transaction.
- who the other party was (even if it’s only their bitcoin address).
What to do if in doubt
- Search for the local tax regulators online guide, usually available on their website. The guidance sometimes comes with examples and detailed guidance on filing requirements.
- If still in doubt, write to the tax authority of your jurisdiction with specific queries. Although this might take time, we believe that they will reply most of the time.
- Consult and engage a tax agent or expert for more concrete advice.
SMEs need to consider the tax implications when using cryptocurrencies for business-related activities, especially in jurisdictions with a lack of formal crypto tax legislation. Regulations are changing fast and so you need to get organised. Important considerations include –
- what the cryptocurrency is used for.
- understanding what type of enterprise.
- current tax regulations in the jurisdictions your SME operates.
- the type of records that must be kept.
Because cryptocurrency taxes can be unpredictable, especially since there is lack of formal guidance in many jurisdictions, SMEs must take precautions to protect themselves and make efforts to understand the regulatory landscape as best as possible. As cryptocurrencies proliferate, regulations continue to get implemented on a piecemeal basis. It’s important to understand that crypto taxation in many jurisdictions is somewhat of a grey area and so requires careful consideration.
To find out how cryptocurrency is taxed in five leading jurisdictions, check out this article on cryptocurrency taxation.
Also published on Medium.