Taxes and Tax Residency

Taxation in the Crypto Space

10/27/2021 8:00:00 AM
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When the crypto revolution began, most people expected that in a few years, Bitcoin would create a kind of payment alternative to the traditional financial system. Bitcoin would provide fast, private, untraceable and non-taxative transactions between individuals and organizations worldwide.

In fact, it did. What most people didn’t expect was that governments all around the world would begin efforts to tax crypto transactions and defend the FIAT currencies hegemony.

Bitcoin once promised the end of the US dollar hegemony, but today this is not clear, as governments and Central Banks are creating Acts to regulate and tax cryptocurrencies.

Regarding crypto, there is a wide range of approaches. For example, El Salvador imposed bitcoin as the official currency of the country. The other side of the coin is China, which considers bitcoin as illegal.

In a nutshell, we will tell you some key facts about the present and future of taxation in the crypto space:

-There is still not a clear consensus about what is a cryptocurrency. Is it an asset? Is it a currency? If Tax authorities reach a consensus defining cryptos, then it would be the basis for taxation.

-Profits made by traders, miners and crypto-exchanges are generally taxable.

-For investors, there is not a clear position yet. Many governments have their own ideas on how to tax returns made by investors.

Bitcoin and other cryptocurrencies represent the greatest challenge the global financial system has ever faced. It’s up to federal and private institutions to address this issue and evolve. In this article, we will give you some insights about taxes on Crypto Space around the world.

Taxation in the United States

An old man said that there are two things certain in life: Death and taxes. Even though in the first years of the bitcoin revolution crypto holders were in some kind of grayzone for U.S. regulators, now this is changing fast, as federal institutions are creating new acts to regulate and tax Crypto.

Since 2014, the IRS (Internal Revenue System) treats bitcoin and other cryptocurrencies as an asset. Also, if you are paid in a virtual currency it can be treated as a taxable income. Generally, any virtual transaction could be taxable and therefore you must report it to the local authorities.

If you don’t do it, you could have trouble with the IRS. In fact, the agency recently increased its efforts to subpoena crypto exchanges (such as Coinbase) and ask them for information about non-compliant U.S. taxpayers.

In fact, in 2019 the IRS sent letters to 10,000 people urging them to review their past returns and remind them of their tax obligations on virtual currencies. These tactics are part of a broader strategy to increase compliance among crypto taxation in the U.S.

You can read more about Crypto taxation in the United States in this article about the IRS efforts to regulate cryptocurrencies.

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Crypto Taxation in Europe

In recent years, the European Union has been increasing regulation of cryptocurrencies. If you are a trader or have crypto investments in the Old Continent, then you must have at least a basic knowledge about regulations in the region or you could end up like Linus Dunker, the Swedish that was charged with a tax bill worth almost $1 million.

Dunker’s infamous case may be the biggest case, but not the only one. In 2018, the Swedish Taxing Agency opened investigations on 400 Swedish crypto traders in order to foster tax compliance in these increasingly used economic activities.

Even though the European Union enforces regulations and fosters tax compliance in cryptocurrencies, concrete measures are still up to individual countries. So on, we will highlight some of the most remarkable cases.

Such as happens at the international level, in Europe each case will vary on essential things such as the definition of a virtual currency, the intended use of the currency, etc.

In Slovenia

In Slovenia, profit made from currency is 0% subject to income tax. However, new guidelines from the Slovenian authorities state that companies issuing tokens must apply the Value Added Tax (VAT).

The United Kingdom

The HMRC (abbreviation of Her Majesty’s Revenue & Customs) states that their view of crypto taxation may evolve in the future in accordance with the fast-moving crypto Space. However, we can give you some insights on how crypto is being taxed right now in the UK. In a Nutshell:

- British authorities don’t consider crypto to be currency or money. In fact, Bitcoin is defined as an exchange token.

- Crypto's taxation is based on the activity of the holder. For example, an individual who owns crypto as a personal investment may be liable to pay Capital Gains Tax when they sell the assets.

- A trader may be subject to pay income tax (0-46%), depending on the income and the place where he or she lives.

In Germany

Germany offers one of the best tax frameworks for crypto in the Eurozone, as it charges a 0% tax rate on bitcoin transactions. However, the leading nation of Europe has supported efforts to create a European Union regulatory framework. Some of the highlights of Crypto in Germany are:

- Bitcoin is not defined as legal tenders, meaning that businesses are not obliged to accept it as a payment method.

- Cryptos can’t be classified as e-money as they don’t technically have an issuer. They are seen as private money.

- Crypto exchanges to FIAT currency are VAT exempt. Capital gains of no more than 600 EUR are also tax exempt. 

- Bitcoin mining can be subject to income tax.

In Italy

Actually there are no specific crypto tax rules in this country. However, Italian authorities have provided some remarkable guidance:

- For individuals, the tax rate is 26% only for speculative activities, which are defined as holding at least 51,000 EUR in cryptocurrency for at least seven (7) consecutive days in the fiscal year.

- Crypto traders are subject to income tax on profits. 

- Companies are subject to corporate tax on profits or losses when exchanging cryptos and other currencies.

- When exchanging cryptos and Euros (or other FIAT), the cryptos will be considered foreign currency.

Taxation in Asia

In Asia there are some interesting cases for crypto taxation. Here we will give you a brief explanation on some of the most remarkable cases:

In China

Even though China has been really assertive when finding new ways to use blockchain technology, it has restricted the use of private crypto (like Bitcoin). Some quick facts about Cryptos in China:

- Initial Coin Offerings are not allowed.

- Even though China hosts the largest Bitcoin mining farms in the planet, it is illegal for individuals to own Crypto.

- Cryptos are not regarded as lengal tenders

- There are no express provisions for Crypto taxation.

In Japan

Japanese laws define cryptos as “property value” which can be traded or transferred electronically. 

There are no restrictions on owning cryptocurrencies. Regarding taxation, crypto gains will be treated as miscellaneous income. Also, cryptos will be subject to inheritance tax.

In Singapore

Singapore is one of the friendliest countries for crypto on the planet, according to Nasdaq. There is no capital gains tax for profit made when investing in crypto.

The government has stated that crypto is acceptable as a method of payment and recognized as a form of personal asset. However, Singapore does apply Goods and Services tax, which is currently at 7%. 

The Salvadorian Case

El Salvador, a Central-American little nation, surprised the world when it became the first country on the planet to adopt bitcoin as its legal currency, alongside with the U.S. Dollar.

The Time magazine ranked El Salvador’s plan as the biggest test for bitcoin in its 12-years-life. Government officials have announced that foreign investors will not be required to pay taxes on profit from Bitcoin. This measure is aimed at stimulating foreign investment. “If a person has assets in bitcoin and makes high profits, there will be no tax”, said a government adviser to AFP.

Solution for Crypto Taxation

After analyzing some remarkable cases of crypto taxation on the planet, you may be asking how to mitigate any tax liability for your crypto investments.

We have a solution for you. The key for tax optimization is to invest indirectly in the Crypto Space, creating a crypto portfolio through an investment vehicle.

If done properly, the tax point would only arise on the liquidation of the investment vehicle, when the investor would have to declare the profit and pay the proper taxes.

What can we do for you?

In Mundo, our mission is to give freedom to our clients. That’s why we are always looking for new solutions and investment opportunities for them.

Cryptocurrencies have begun a revolution in economics. Financial institutions are still assessing how to regulate and tax virtual currencies, yet there isn’t even a clear consensus on what cryptocurrencies are.

In this context, it is vital for crypto investors to limit any liability his or her crypto investments may have now or in the future.

Thanks to our long-standing relationship with our parent company, we have developed a wide network of experts worldwide. One of our partners is an international financial firm composed of some of the best specialists in the market.

They can offer you a wide range of solutions for securing and limiting tax liability for your crypto investments.

Crypto taxation is a reality. Secure your crypto investment with Mundo. Contact us now!

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