The anonymity of cryptocurrencies and their lack of control are a thing of the past – regulators introduce strict requirements for cryptocurrency exchanges to comply with KYC / AML procedures and strive to completely control the market. Gradually, it comes to taxes.
So, on Tuesday, the UK Revenue Service (HMRC) requested from cryptocurrency exchanges Coinbase , eToro and CEX․IO user data and the history of their transactions. And in June, the U.S. Internal Revenue Service (IRS) sent 10,000 letters to cryptocurrency holders warning them to pay off tax arrears.
Mining-Cryptocurrency.ru figured out what are the main difficulties with building an effective system of taxation on income from cryptocurrencies.
It is difficult for tax authorities to collect data about traders
Deciding to pay taxes on income from cryptocurrencies is easy, but finding out about them is much more difficult. Moreover, it is not always clear to traders how to pay them, and to tax authorities how to charge them. This is evidenced by the fact that collecting taxes from cryptocurrencies does not work even among the most developed economies in the world.
The key problem is that the tax authorities simply do not know who conducts transactions with cryptocurrencies, to what extent and with what profit. And crypto-exchanges voluntarily share this information in no hurry, even despite the instructions of the FATF .
Nevertheless, the authorities do not rely on the honesty of traders and themselves request from cryptocurrency exchanges data on potential non-payers. For example, this year the data of crypto-exchange users were requested by the tax authorities of Denmark and Bulgaria , and from 2020, the Japanese authorities are going to do this. It is noteworthy that the Japan Financial Services Agency received a proposal to reduce taxes on crypto income from the current 50% to 20%. And from August 1, traders from Brazil are required to report their crypto transactions to the country's tax authority.
In early August, the UK Revenue Service (HMRC) also requested a number of cryptocurrency exchanges for user names and the history of their transactions over the past 2-3 years. Requests were received by at least three exchanges operating in the jurisdiction of the country – Coinbase, eToro and CEX.IO. In this way, the HMRC hopes to identify tax evaders.
Interestingly, the HMRC actions follow the pattern set by the United States Internal Revenue Service (IRS). So, at the end of June, the IRS sent “warning” letters to 10,000 US crypto-exchange users urging them to pay off tax arrears, if any. Addressee data was obtained “as a result of various ongoing efforts to comply with IRS requirements.”
Cryptocurrency holders in the United States received one of three types of letters stating that:
- The IRS knows that the user has cryptocurrencies, and warns him to pay taxes;
- The IRS only suspects the user of non-payment of taxes on income from cryptocurrencies;
- The IRS is confident that the user has not paid a tax on cryptocurrency income.
The Office strongly recommends taking letters seriously, declaring income from cryptocurrencies, as well as correcting old declarations by adding data on earnings on cryptocurrencies to them, as well as "pay taxes, interest and penalties."
According to American experts, these were most likely automatic letters aimed at motivating voluntary compliance with the law, rather than personal calls against specific traders. Presumably, the IRS uses a list of traders received from the Coinbase exchange in 2017, and thus tries to exert psychological pressure on them.
It is difficult for traders to calculate taxable income
In most countries, taxes must be paid on capital gains or on profits. But cryptocurrencies have crazy volatility, and the exchange rate on different exchanges can differ significantly. Therefore, when calculating the tax, it is not clear how to determine the value of currencies at a given time, how to take into account ICO and fork of coins. Without this, it is impossible to determine with what amount the tax should be paid.
Legislation of a number of countries, for example, Great Britain, Germany, Australia, the USA and Canada, consider cryptocurrencies as an analogue of securities or property and require recording data of each transaction and reporting for them. But calculating the data for each transaction is difficult. To do this, it is proposed to use CoinDesk indexes or averaged values , or use specialized software: for example, Bitcoin.tax.
Vlad Burilov, consultant of international legal practice at O2 Consulting, spoke about the difficult situation in the USA, where you have to pay tax from any exchange transaction (even from crypto to crypto):
“For example, at the beginning of 2017, a trader acquired Bitcoins for $ 10,000. At the end of 2017, when their market value, for example, was already $ 100,000, he exchanged bitcoins for altcoins, whose value by the end of 2018 was $ 30,000. It seems logical, that the profit is $ 20,000, and tax must be paid on this amount. However, in fact, according to the rules of taxation of income from the sale of property in the USA, to which the IRS equated cryptocurrency, the trader had to pay income tax on the sale of bitcoins in the tax period in which the exchange of bitcoins for altcoins took place (i.e. for 2017).
For the IRS, the taxable event is not the fact of exchanging cryptocurrency for fiat, but the fact of exchanging cryptocurrency for cryptocurrency. Then the trader had to pay tax not with $ 20,000, but with $ 90,000, that is, with the difference between the market value of bitcoins at the time of their exchange and the cost of acquiring bitcoins. As a result of this situation, a gap is formed between the tax liability for the previous tax period and the actual ability to pay tax. Until 2019, traders could take advantage of a loophole in the law (the so-called property exchange rule 1031), which allowed tax-free operations to exchange one cryptocurrency for another. But now, every trader must keep track of all crypto-exchange operations, including transaction dates, market value of the asset upon disposal and arrival. ”
It is difficult for banks to accept funds received from the sale of cryptocurrencies
In some jurisdictions, banks are reinsured and refuse to accept funds received from cryptocurrencies.
For example, Israeli investors have similar difficulties. Cryptocurrencies in the country are considered assets for which taxes must be paid: 25% for capital gains for individuals and 47% for companies. But thousands of investors in the country cannot pay tax because they cannot deposit the income received from investments into local bank accounts. Banks do not accept deposits received due to cryptocurrencies, since bitcoin has not yet been recognized by the authorities as a means of payment and may be involved in money laundering and terrorist financing.
The Israeli edition of Haaretz reports on cases where foreclosure was imposed on investors' property for non-payment of taxes on income from trading cryptocurrencies. According to the publication, the Israeli Tax Service is aware of the problem, but can not do anything on its part. In total, she is still aware of the $ 85.7 million of unpaid cryptocurrency income tax. Sometimes the tax is to meet investors who encounter problems with banks, and transfers the payment.
Gaps in the legislation force investors to use illegal exchangers and keep funds in foreign banks. There are judicial attempts to solve the problem: trader Roy Erev is suing the Israel Discount Bank for refusing to accept money received from trading bitcoins. If Erev wins, this will set a precedent for other similar cases.
The problem of blocking accounts is also relevant for Russia. Earlier, we released separate material on how not to get an account lock in a Russian bank for the purchase of cryptocurrency .
It is difficult for regulators to determine the legal status of cryptocurrencies
Unlike the above countries, in Russia, as in a number of other states, the status of cryptocurrencies — property, property law, or means of payment — has not yet been determined. So, it is not clear how to pay tax for them. The procedure for taxation of income from cryptocurrencies is indicated in:
According to these letters, the Tax Code does not establish a special taxation procedure for cryptocurrencies, which means that the tax must be paid according to the general scheme – from profit. It is impossible to apply a property tax deduction to cryptocurrency transactions, since crypto assets are not considered property (although there is a court decision recognizing cryptocurrencies as property). Instead, the taxpayer can reduce the taxable amount by the amount of confirmed expenses. In controversial situations, according to the Ministry of Finance, any uncertainty in the law should be interpreted in favor of the taxpayer.
If a trader wants to pay income tax for cryptocurrencies, then when he purchases it, he needs to receive documentary evidence of the payment: a check, a screenshot, a receipt, and indicate “cryptocurrency purchase” in the payment purpose. When selling, you need to do the same. After that, the trader must fill out the 3-NDFL declaration and submit it by April 30 of the year following the year in which the income was received. You need to pay with the difference between the purchase and sale price – 13% for residents. If a trader incurs losses during the sale, you do not need to pay tax. The tax base is considered in rubles, and the tax must be paid until June 15 inclusive.
Now the tax service does not have the ability to automatically receive information about the crypto assets of Russian citizens. At the same time, banks report all payments of over 600,000 rubles to RosFinMonitoring, and traders get into the tax data only upon request from them. There is no court practice for non-payment of taxes on income from cryptocurrencies in Russia yet. However, the reason is not in the humanity of justice, but in the lack of tax technical capabilities to track crypto transactions and associate them with a specific taxpayer.
Taxes – the flip side of the adoption of cryptocurrencies and their institutionalization
Taxes are an inevitable fee for regulating cryptocurrencies. Obviously, everyone who wants to stay within the legal framework and not break the law will have to pay taxes on income from crypto assets. Responsibility for non-payment will also grow. Already, the IRS is threatening a prison term of up to five years and a fine of up to $ 250,000 for anyone convicted of tax evasion from cryptocurrency income.
Building an efficient and convenient taxation of cryptocurrencies is not easy. This is hindered by their decentralized nature, great volatility, accounting difficulties, often uncertain legal status, and financial “anarchism” of the crypto community.
An attempt to equate crypto with traditional assets shows that they are poorly predisposed to this. It is also impossible to automatically apply the existing legislation to them. Regulators, tax services and banks have yet to create an effective system for working with cryptocurrencies and levying taxes on income from them.
Publication date 08/08/2019
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