False narratives have a way to create a domino effect in which individuals are bound to find trouble. The whole issue of how Bitcoin is taxed is one of these instances in which false narratives dominate. Bitcoin itself might be immune to the whims of governments, but individuals who use it, hold it or trade it, are well within the reach of the agencies responsible for executing the law of the land.
The Bitcoin Taxation Conundrum
With the adoption of cryptocurrencies, countries have enacted rules and regulations to tax economic activity that uses this new form of money (or assets, or property, depending on who you ask). Even though Bitcoin was designed as a form of money and is arguably the best alternative we have, regulators and lawmakers have taxed it according to their own interpretation of what Bitcoin is. Broadly, countries use three approaches towards taxation of crypto [external link: https://blockonomi.com/cryptocurrency-taxes/]:
- Income tax – for non-corporate entities that receive BTC or other crypto as income.
- Capital gains tax – when Bitcoin is seen as a property or asset, and owners or traders are taxed on any gains from their holdings. Taxation can be either on short-term or long-term gains.
- Company tax – for incorporated entities (businesses) that conduct large scale operations (mining or exchanging, for instance).
How is Bitcoin Taxed Around the World?
Like most things crypto, taxation regimes vary by country and are constantly changing, but below we provide a few examples to wrap our heads around Bitcoin tax:
United States of America
In the US, the debate of what Bitcoin is has not impeded the IRS from enacting rules on how to report economic activities. The IRS treats Bitcoin and other cryptocurrencies as “convertible virtual currencies”. In the long term, meaning holding for more than a year, they are treated as property or stock and taxes are applicable to capital gains when selling.
In the short run, Bitcoin is also treated as property and every transaction should be recorded and reported, though not all transactions are necessarily taxed. A wallet to wallet transfer could be exempt from taxation, while short term gains on capital will be taxed.
Transactions that will be taxed include:
- Selling bitcoins, mined personally, to a third party.
- Selling bitcoins, bought from someone, to a third party.
- Using bitcoins, which one may have mined, to buy goods or services.
- Using bitcoins, bought from someone, to buy goods or services.
Receiving payment for goods or services will be taxed the same way payments with other property are taxed. The IRS say: “Transactions using virtual currency must be reported in U.S. dollars. Taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars … at the exchange rate, in a reasonable manner that is consistently applied.”.
The full treatment of Bitcoin and other cryptocurrencies can be found on the IRS website.
In Israel, Bitcoin has been deemed a property, or asset, by all sides.
- The central bank declared it an asset.
- The tax authority, in line with the central bank, issued a notice in 2018 confirming its stance on treating Bitcoin as property, and taxing it accordingly. Holders of cryptocurrencies are subjected to a 20%-25% capital gains tax, while individuals mining or trading cryptocurrencies through businesses and exchanges have to pay a 17% VAT on top of the capital gains tax.
- Businesses investing in cryptocurrencies may be subjected to up to 47% marginal rate tax.
- An Israeli court ruled against a defendant claiming Bitcoin was a currency, and declared the cryptocurrency was in fact an asset and had a long way to go before being treated as a currency.
In 2017, Japan officially recognized Bitcoin as a form of payment, subjected to an 8% consumption tax.
Later the same year, Japan removed the 8% consumption tax on Bitcoin transactions, making it closer to being treated as a currency, checks, or promissory notes.
However, in December of the same year, its National Tax Agency published a set of guidelines for taxing “profits arising from selling or using virtual currency, including bitcoin,” which brought bitcoin back to being treated more like property.
After the European Court of Justice – ECJ – ruled that Bitcoin transactions from exchanges should be taken as currency exchanges, eliminating VAT surcharges on them. Capital gains do apply on profits once cryptocurrencies are exchanged for fiat. The tax rate depends on which country you live in within the European Union.
Bitcoin Taxation Diversity
Governments and tax authorities continue to develop rules and regulations for properly taxing Bitcoin. As the case of Japan highlights, there is no guarantee that it will be treated as currency or property. In cases like the US, it may be treated as one or the other depending on the activity (buying and selling vs mining), or property (holding for more than a year). Each country has its own way to tax economic activity denominated in Bitcoin, and economic activity is always taxable. The issue is, how effective are they collecting?