As tax reporting time rolls around again, you’ve probably started investigating your cryptocurrency holdings and potential tax obligations. But how is cryptocurrency taxed? The answer can be complicated.
With the rise of cryptocurrency and altcoins, more nations are looking to formalise their taxation guidelines to help people identify the taxability of cryptocurrency. With the absence of such formal guidelines, many people remain unsure if cryptocurrency in general is taxable– the timing for when they become taxable, and how they taxed.
This post aims to provide a summary of cryptocurrency taxation in five leading jurisdictions that have issued formal tax regulations.
1. Cryptocurrency Taxation in the United States of America
Internal Revenue Service (IRS)
How are cryptocurrencies taxed in the US? Virtual currency is treated as property for U.S. federal tax purposes. Below are some of the key guidelines broken down into the type of transaction.
Virtual currency as payment for goods or services
When computing gross income- the IRS suggests to include the fair market value of the virtual currency measured in U.S. dollars, as of the date that the virtual currency was received.
If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has a taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.
In such case, the virtual currency used to pay for the goods and services will be treated similarly to that of a sale of virtual currency.
Sale or exchange of virtual currency
A sale or exchange of virtual currency is divided into two types, either capital in nature or not. A person who sells virtual currency that is capital in nature realises a capital gain or loss (the difference between your basis (what you paid for the asset) and the amount you get when you sell an asset). Some examples of virtual currencies that are capital in nature are associated with stocks, bonds, and other investment property.
If capital in nature, include all capital gains when computing gross income. This may be subject to the Net Investment Income Tax if your income is above certain amounts. The rate of this tax is 3.8 percent. If you had made losses, these losses could be used to offset your capital gains.
Virtual currencies that are not capital in nature are subject to the realisation of ordinary gains or losses. Some examples would be if associated with inventory and other property held for trade or business.
Ordinary gains get taxed as ordinary income. Ordinary losses can be used to offset other income.
In computing gross income for persons who acquired virtual currencies via mining activities, the fair market value of the virtual currency as of the date of receipt needs to be included.
If the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income less allowable deductions) resulting from those activities constitute self-employment income and are subject to the self-employment tax.
Virtual currency as remuneration
If you receive virtual currencies for services performed in lieu of employment, the fair value of the virtual currency received constitutes wages for employment tax purposes.
If received by an independent contractor for performing services, the fair value of the virtual currency received would constitute self-employment income.
Persons who make payments with virtual currency are subject to information reporting to the same extent as any other payment made in property. For example, a person who in the course of a trade or business makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year – is required to report the payment to the IRS and the payee.
Examples of payments of fixed and determinable income include rent, salaries, wages, premiums, annuities, and compensation.
Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer, and are subject to federal income tax withholding and payroll taxes.
Payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply.
Virtual currency is not treated as currency that gives rise to foreign currency gain or loss.
2. Cryptocurrency Taxation in The United Kingdom
Her Majesty’s Revenue & Customs (HMRC)
HMRC defines a token as ‘private money’ in the UK. How are cryptocurrencies taxed in The United Kingdom?
For VAT purposes
Income received from Bitcoin mining activities is generally considered outside the scope of VAT on the basis that the action does not constitute an economic activity for VAT purposes.
Income received by miners for other activities, such as for the provision of services in connection with the verification of specific transactions for which specific charges are made, is exempt from VAT under Article 135(1)(d) of the EU VAT Directive – as falling within the definition of ‘transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments’.
When Bitcoin is exchanged for Sterling or foreign currencies, such as Euros or Dollars, no VAT is due on the value of the Bitcoins themselves.
Charges (in whatever form) made over and above the value of the Bitcoin for arranging or carrying out any transactions in Bitcoin will be exempt from VAT under Article 135(1)(d) as outlined above.
However, in all instances, VAT will be due in the normal way from suppliers of any goods or services sold in exchange for Bitcoin or other similar cryptocurrencies. The value of the supply of goods or services on which VAT is due will be the Sterling value of the cryptocurrency at the point the transaction takes place.
Corporation Tax (CT), Income Tax (IT) and Capital Gains Tax (CGT) treatment of Bitcoin and similar cryptocurrencies –
HMRC has made it clear that, whether any profit or gain is chargeable or any loss is allowable, it will be looked at on a case-by-case basis taking into account the specific facts. The relevant legislation and case law will be applied to determine the correct tax treatment.
For businesses which accept payment for goods or services in Bitcoin or other cryptocurrencies, there is no change to when revenue is recognised or how taxable profits are calculated.
The profits or losses on exchange movements between currencies are taxable. For the tax treatment of virtual currencies, the general rules on foreign exchange and loan relationships apply.
For companies, exchange movements get determined by the company’s functional currency (usually the currency in which the accounts are prepared) and the other currency in question. If there is an exchange rate between Bitcoin and the functional currency, then this analysis applies. Therefore no special tax rules for Bitcoin transactions are required. The profits and losses of a company entering into transactions involving Bitcoin would be reflected in accounts and taxable under standard CT rules.
The profits and losses of a non-incorporated business on Bitcoin transactions must be reflected in accounts and will be taxable under normal income tax rules.
Capital Gains Tax
If a profit or loss on a currency contract is not within trading profits or otherwise within the loan relationship rules, it would typically be taxable as a chargeable gain or allowable as a loss for corporate tax or capital gains tax purposes. Gains and losses incurred on Bitcoin or other cryptocurrencies are chargeable or allowable for capital gains tax if they accrue to an individual or, for corporate tax on chargeable gains if they accrue to a company.
3. Cryptocurrency Taxation in Australia
Australian Taxation Office (ATO)
For taxation, the ATO recommends keeping the following records for Bitcoin transactions:
- the date of the transactions
- the amount in Australian dollars (which can be taken from a reputable online exchange)
- what the transaction was for
- who the other party was (even if it’s only their Bitcoin address)
Payment for goods or services
There are no income tax or GST implications if you are not in business. Any capital gain or loss from disposal of Bitcoin or other cryptocurrency is disregarded (as a personal use asset) provided the cost of the bitcoins is $10,000 or less.
Where carrying on a business and purchasing business items using Bitcoin (including trading stock) you are entitled to a deduction based on the arm’s length value of the item acquired.
There may also be capital gains tax consequences where you dispose of Bitcoin as part of carrying on a business. If as part of your business, the value in Australian dollars will be the fair market value which can be obtained from a reputable Bitcoin exchange, for example.
If the supply of the goods and services was a taxable supply, the business could claim input tax credits on the GST charged on the Bitcoin they received as payment.
Where an employee has a valid salary sacrifice arrangement with their employer to receive bitcoins as remuneration instead of Australian dollars, the payment of the bitcoins is a fringe benefit. In the absence of a valid salary sacrifice agreement, the remuneration is treated as normal salary or wages.
With a valid salary sacrifice arrangement, the employer is subject to the provisions of the Fringe Benefits Tax Assessment Act. In the absence of a valid salary sacrifice agreement, the employer will need to meet their pay as you go obligations as usual.
Mining as trade or business
Any income derived from the transfer of mined Bitcoin to a third party is included in assessable income. Any expenses incurred in respect to the mining activity would be allowed as a deduction. Losses made from the mining activity may also be subject to the non-commercial loss provisions.
Bitcoin held by a taxpayer carrying on a business of mining and selling bitcoins will be considered to be trading stock. Tax payers are required to bring to account any Bitcoin on hand at the end of each income year.
Buying and selling Bitcoin as an exchange service
The proceeds derived from the sale of Bitcoin are included in assessable income. Any expenses incurred with respect to the exchange service, including the acquisition of Bitcoin for sale, are allowed as a deduction.
Bitcoin held by a taxpayer carrying on a Bitcoin exchange will be considered to be trading stock. You are required to bring to account any Bitcoin on hand at the end of each income year.
GST is payable on a supply of Bitcoin by an individual in the course or furtherance of the exchange service enterprise. Input tax credits are available for bitcoins acquired if the supply of Bitcoin is a taxable supply.
Bitcoin as investment
For businesses that have acquired Bitcoin as an investment, capital gains tax could apply. If you are not carrying on a business of Bitcoin investment, you will not be assessed on any profits resulting from the sale or allowed any deductions for any losses made. However, if transactions amount to a profit-making undertaking or plan, then the profits on disposal of the Bitcoin will be assessable income.
There are no GST consequences where the Bitcoin is not supplied or acquired in the course or furtherance of an enterprise you are carrying on.
4. Cryptocurrency Taxation in Singapore
Inland Revenue Authority of Singapore (IRAS)
IRAS issued some guidance for virtual currency summarised below.
As a mode of payment
Businesses that accept tokens as payment for goods or services should record the sale based on the open market value of the goods or services in Singapore dollars. The same applies to businesses which pay for goods or services using tokens.
If the open market value of the goods or services that would have otherwise been exchanged in Singapore dollars cannot be determined (e.g., the good or service is only traded with tokens), the token exchange rate at the point of the transaction may be used.
Businesses that buy and sell tokens in the ordinary course of their business will be taxed on the profit derived from trading in the token.
Businesses that buy tokens for long-term investment purposes may enjoy a capital gain from the disposal of these tokens. However, as there are no capital gains taxes in Singapore, such gains are not subject to tax.
Whether gains from disposal of tokens are trading or capital gains depends on the facts and circumstances of each case. Factors such as purpose, the frequency of transactions, and holding periods are considered when determining if such gains are taxable.
5. Cryptocurrency Taxation in Japan
National Tax Agency – Japan
The National Tax Agency of Japan issued regulations in Japanese which can be viewed here. In 2017, the country’s government officially recognised Bitcoin as a method of payment.
The sale of Bitcoin held for investment purposes can be considered a capital gain or loss. As a general rule, the gains and losses (gains and losses recognised by relative relationships with domestic and foreign currencies) from the use of Bitcoin, except for cases arising in association with activities that cause incomes such as business income, will be classified as miscellaneous income.
If received or paid as compensation for assets or services rendered it can be treated as a form of barter exchange.
If you’re just starting out in the crypto world and want to know how to contribute to an ICO or buy new cryptocurrencies, read this easy to follow step-by-step guide.
Disclaimer: The tax treatments outlined in this article are based on information available at the time. Since virtual currencies are relatively new to the world, frequent changes to the regulations can be expected in the future. It is suggested to keep a lookout for new regulations and when in doubt consult a qualified tax professional in your jurisdiction and/or the respective tax authority for guidance to avoid any penalties. This article is not to be relied on for tax filing purposes.
Also published on Medium.