Each country, state, or even city has its own set of rules when it comes to determining which crypto transactions are taxable. However, few have clear guidelines as cryptocurrency is still a nascent area for governments to tackle.
With the rise in price and the growing adoption of cryptocurrencies, more governments worldwide have been ramping up efforts to tax them. Some countries are using extreme measures to get their hands on this new source of untapped revenue, but there are also tax-friendly countries that are not taxing crypto transactions. Furthermore, many tools exist to help crypto owners.
Know How Your Government Taxes Crypto
The U.S., for example, first released guidance for crypto taxation back in 2014, but left out many issues. Five years later, on Oct. 9, the country’s tax agency, the Internal Revenue Service (IRS), published follow-up guidelines that answer many questions but also raise some unanswered ones. Besides, the tax agency seems to be confused about some key concepts such as how hard forks and airdrops work.
As a taxpayer, it is important to understand what is taxed in your country. In the U.S., the IRS explained:
The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.
Furthermore, anyone who received cryptocurrency “from an airdrop following a hard fork”, will owe taxes “provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency”, the new IRS guidance details. Meanwhile, some crypto transactions are nontaxable such as donating cryptocurrency to qualified tax-exempt organizations.
Those Probing Questionnaires
As more governments realize cryptocurrency’s potential for generating tax revenue, they are also aware that they are missing out by not finding all crypto owners and taxing them. Some tax authorities worldwide have attempted to obtain information on taxpayers’ crypto holdings and activities through probing questionnaires.
The Indian Office of the Deputy Director of Income Tax has been mailing crypto owners a long list of questions, ranging from sources of income to the names of the cryptocurrencies traded and details about hardware wallets. The Canada Revenue Agency has also sent a detailed questionnaire to the citizens it believes to own cryptocurrency. Another example is the tax agency of Denmark, Skattestyrelsen, which has been authorized by the country’s tax council to obtain information about cryptocurrency trades conducted on some local exchanges.
On Oct. 11, the IRS published a draft of the new 1040 tax form which contains a question on cryptocurrency: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This form is the main U.S. tax form used by over 150 million taxpayers.
More Aggressive Tactics
If tax authorities believe that a significant number of people are not reporting and fulfilling their tax obligations, they may employ various tactics to convince them to do so. The IRS, for example, has tried to remind crypto owners to pay taxes by mailing letters to more than 10,000 of them. It followed up with a video about another tax notice which seeks to rectify recipients’ tax reporting discrepancies. While these letters may seem like a big deal, some people believe that they are more of a phishing campaign since the agency simply does not have enough manpower to go after all crypto owners.
Tax agencies may also use more aggressive measures to boost their revenue. An IRS cybercrime presentation shows alarming recommendations on how tax agents should deal with crypto tax evaders, including questioning their friends and family, analyzing their social media posts, and issuing subpoenas. For Americans with more than $52,000 in overdue taxes, the agency may even revoke their passports until their tax bills are settled. Recently, the Turkish tax authority froze the bank accounts of over 3 million people for nonpayment of taxes.
Some Countries Are Much More Tax-Friendly
Each jurisdiction applies different tax rates and rules to crypto transactions. For example, Romania imposes a 10% tax on crypto earnings, Venezuela taxes up to 15% of crypto remittances, and one Swedish trader expected to pay 300% of his crypto profits in taxes. Japan, often hailed as one of the most crypto-friendly countries, taxes crypto income as high as 55%. However, a proposal is already in place to lower this rate in four different ways. India presently has no legal framework for cryptocurrency, but income from crypto assets can be taxed in three different ways. Portugal, on the other hand, has emerged as a crypto haven due to its policy to exempt cryptocurrency from capital gains tax and VAT. A local tax expert detailed:
The appreciation of cryptocurrencies or any gains on the direct sale of cryptocurrencies are not taxed in Portugal.
Knowing how other countries treat crypto assets for tax purposes can be beneficial, such as when choosing a more crypto tax-friendly place to move to. With some jurisdictions taxing crypto earnings and gains significantly less than others, some crypto investors have renounced their citizenship and relocated in order to lower their tax obligations.
There Are Tools to Help
If you want to file taxes and pay as little as possible, there are many tools to help you. Many software programs can help track your cryptocurrency transactions, calculate your tax liabilities, prepare and even file your tax returns. Some allow you to download your transaction data directly from exchanges and wallets. News.Bitcoin.com recently published a list of 10 useful tax tools for crypto owners.
Some People Are Still Not Paying
Despite intense efforts by tax authorities, many people in and around the crypto community strongly believe that taxation is a form of theft, and flat out refuse to pay them. A survey by personal finance firm Credit Karma shows that an increasing number of people would not declare their crypto income. One prominent tax evader is former antivirus tycoon and cryptocurrency advocate John McAfee. After fleeing the U.S. and declaring war on the IRS from his boat, he exclaimed:
I have not paid taxes for eight years and I have made no secret of it.
Disclaimer: This article is for informational purposes only. It is not an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any products, services, or companies.