Taxation has a major impact on the return that any investment generates. This is the reason why it is important to understand the impact of taxation on cryptocurrencies. However, since cryptocurrencies are relatively new, there is considerable ambiguity regarding the taxability of cryptocurrencies.
In this article, we will have a closer look at some of the principles that are followed during this taxation process. Also, we will understand the laws pertaining to taxation of cryptocurrencies which are in force at the present moment.
Cryptocurrencies in Australia and Canada
The laws of Canada and Australia are somewhat similar when it comes to treatment of cryptocurrencies. Both these countries do not consider cryptocurrencies to be a real currency. This is because as per their definition legal currencies can only be issued by central banks. However, they do acknowledge the fact that it is possible to undertake transactions by offering Bitcoin as means of payment. Since Bitcoin, (which Australia and Canada consider to be a commodity) is exchanged for other goods and services, the transaction is considered to be a barter transaction. This means from a legal point of view, these transactions are considered to be happening without the use of any currency. In these nations, barter transactions are exempt from Goods and Services Tax (GST). As a result, transactions denominated in Bitcoin are not charged GST. This is a big loophole in the law, and Canadian and Australian governments are making an attempt to close it as soon as possible.
Cryptocurrencies in the United Kingdom
The law in the United Kingdom realizes the fact that taxation of cryptocurrencies is not a simple proposition. This is because the same cryptocurrency can be, used for end use as well as for investment purpose. Hence, taxation of cryptocurrencies needs to be done on a case by case basis by understanding the specifics.
- In some cases, the United Kingdom taxation authorities consider Bitcoin to be a highly speculative investment. As a result, they compare it with gambling. Gambling losses cannot be deducted from taxable income. Similarly, gambling gains are also not added to taxable income. Similarly, in some cases, cryptocurrencies are simply left out of the taxation ambit
- In other cases, the tax authorities check the intention of the seller. Also, the legal status of the seller is analyzed. Based on this tax analysis, experts decide whether a transaction should be a part of an individual tax or a corporate tax.
- In some cases, the United Kingdom tax authorities consider cryptocurrencies to be foreign currencies. Hence, businesses are asked to account for them accordingly and profits and losses arising because of this assumption should be booked based on principles defined under the Generally Accepted Accounting Principles (GAAP)
- The United Kingdom taxation authorities have made it clear that mining of Bitcoins, i.e., generating Bitcoins from computer operations is not considered to be an economic activity for the purposes of taxation. As a result, investors mining Bitcoins receive their gains tax-free!
The problem is that the laws created by the United Kingdom are extremely vague in nature. It gives the tax officers too much freedom. This freedom can be used to extort money from investors in the name of increasing tax compliance.
Cryptocurrencies in the United States
The Internal Revenue Service, i.e., the tax department of the United States has decided to consider Bitcoin as a property and not as an income. This has profound implications for the way it will be taxed. Firstly, people who have made huge sums of money from Bitcoin trading are breathing a sigh of relief. The highest tax rate for capital gains is 15%. This is opposed to a 25% tax that is levied on most incomes. Hence, Bitcoin millionaires will have to shell out a smaller part of their fortune as taxes.
However, the United States tax laws prohibit the set off of investment loss at a maximum of $3000 per year for individual investors. As a result, if investors have lost money in the cryptocurrency market, they cannot offset their huge loss against their income in order to reduce the tax liability. One possible way is to offset only $3000 at a time and to continue doing so for next several years. However, that does not seem to help since Bitcoin is a speculative investment and many people have lost huge sums of money. The worst part is that they will now have to pay tax on their losses!
Cryptocurrency Tax in India
Developing countries like India still do not have the framework required to tax cryptocurrencies. The Reserve Bank of India has prohibited dealings in cryptocurrencies. However, the transactions that have happened in the past could be considered as investments or profits depending upon the source. If they are considered to be investments, they will be taxed at either the short-term or the long-term rate depending on how long they have been held. If they are considered to be profits, their value is added to the income of the taxpayer which is then taxed at the relevant slab.
To sum it up, the world needs to come to a consensus when it comes to taxation of cryptocurrencies. At the present moment, different tax regimes across the world are taxing cryptocurrencies differently. The problem is that since governments have no control over cryptocurrencies, traders can simply move the money to an offshore location where the tax rate is more favorable.