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January 24th, 2023. The exponential growth of digital assets – cryptocurrencies in the first place, but NFTs (non-fungible tokens) as well is undeniable. However, this high-speed evolution is also creating a high level of ambiguity when it comes to taxes.
It looks like tax authorities couldn’t find a consensus when it comes to tax reporting obligations, which is why thousands of investors have been avoiding paying taxes for a couple of years now.
The reason behind this is simple – digital asset ownership and transactions don’t exist in banks’ books but on digital ledgers. This means that the layers of administration are eliminated. Yet, institutions have already started paying more attention to digital assets and trying to put a full stop to tax evasion.
Income and Gains Are Always Taxable
Investors and service providers have been thinking that cryptocurrencies aren’t actually taxable, or simply ignoring this fact. However, capital gains (gains realised by selling capital assets at a higher price than they’ve been bought) are always taxed.
Capital gain tax allowances don’t apply to all countries around the world but do exist in the US and UK and vary between £11,000 and £13,000. In other countries, investors should pay tax no matter how much money they have made of crypto, even if it is £500.
This whole situation just gets more puzzling when we talk about paying in crypto for goods or services. When investors sell crypto for purchases, then VAT and Goods and Services Tax (GST) should be applied along with a capital gains tax liability.
New tax rules should also be applied to stablecoins, coins whose value is pegged to either commodities or currencies. Although they are less volatile, trading stablecoins can still result in capital gains.
More About Crypto Taxes Around the World
The Internal Revenue Service (IRS) stated in Notice 2014-21 (the first cryptocurrency guidance document) that virtual currencies may be either held for investment or used for transactions and that they, as such, come with tax consequences. It is also stated that crypto held for 12 or more months is considered a long-term capital gain, and, thus, it is taxed at a lower rate.
In Canada, capital gains are taxed at 50%, while business income is 100% taxed. Depending on the nature of trading activities, cryptocurrencies fall in the income tax or CGT category.
Germany is a tax haven when it comes to cryptocurrencies. Provided you’ve been holding your crypto for at least a year, you won’t be paying any taxes on your gains. However, if you decide to sell earlier, you’ll be taxed up to 45%. Read more about crypto taxes in Germany.
In July 2022, India introduced a 30% cryptocurrency tax, which resulted in a sharp daily transaction volume drop. On the other hand, India imposed a 1% tax deducted at source (TDS). This government move didn’t calm the criticism down, coming from some of the biggest names in the crypto industry, Changpeng Zhao, Binance CEO, included. Zhao said that taxes this high could kill the crypto industry.
To find out about cryptocurrency taxes in the UK, Switzerland, Spain or Ireland, continue reading our news article on this topic.
Many jurisdictions still haven’t adopted tax rules/tax treatment, and this kind of ambiguity still gives more room for investors and service providers to take advantage of it. Unlike interest or partnership income, wages, and capital gains, cryptocurrencies have been a blind spot for administrative and regulatory bodies.
Considerable amounts of gains have been unreported. However, it looks like we are about to see existing tax frameworks covering digital assets in the near term. More regulation in this field will, potentially, drive even more adoption and make people more confident about investing in cryptocurrencies.
Read this support article How to generate a tax report to comply with your tax obligations resulting from transactions executed at Lykke Wallet, a zero-fee exchange since 2015!