Dubai: The world’s largest cryptocurrency, Bitcoin, is the most widely circulated digital currency or e-currency globally, as of 2020. But how is income from such an asset taxed worldwide?
Although it is yet to gain traction as a legal form of tender or as an official currency in most countries, it is recognised as a medium of investment – albeit a high-risk one.
More than a decade after Bitcoin’s introduction, there is still considerable lack of clarity on how the investment asset is taxed worldwide, and it varies with each country.
The sale or exchange of a convertible virtual currency – including its use to pay for goods or services – has tax implications in most countries where income is taxed. Tax treatment depends on how a virtual currency is held and used.
Is Bitcoin legal everywhere?
It is vital to investigate the legislation governing Bitcoin in various nations, so it has become increasingly important to understand just how cryptocurrencies are taxed worldwide.
Even though it is in rudimentary stages and several countries are yet to provide clarity on how Bitcoin is taxed, the article details how it differs with each country.
Cryptocurrency or Bitcoin is not recognised as a currency in most countries, including the UAE, US, Australia, among others, but rather as an investment asset.
The UAE dirham is the country's only legal currency. Moreover, as there is currently no personal income tax in the UAE, as such, capital gains tax (tax applied to the profits earned on the sale of an asset) is not imposed on UAE national or resident individuals.
However, the use of Bitcoin is made legal in the US, Japan, the UK, and most other industrialised countries as of July 2021. The legal status of Bitcoin in emerging economies is still highly variable.
Cryptocurrency is prohibited in some countries, such as Russia and China, while it is allowed in others, such as Finland, where it is free of Value-added Tax (VAT).
India has outlawed banks from dealing in Bitcoin, and the legal status of cryptocurrencies is still unclear.
How cryptocurrency is taxed in the US
The US Internal Revenue Service (IRS) for the year 2020 requires taxpayers to declare any virtual currency transactions. The tax rate on Bitcoin capital gains varies between 0 per cent and 37 per cent.
Simply buying virtual currency with US dollars and keeping it within the exchange where you made the purchase or transferring it to your personal wallet does not mean you’ll owe taxes on it at the end of the year.
If your only crypto-related activity this year was purchasing a virtual currency with US dollars, you don’t have to report that to the US IRS.
Things start becoming taxable when you use crypto as a method of exchange. This includes selling your crypto for US dollars, exchanging one cryptocurrency for another – buying Ethereum with Bitcoin, for example – or paying for goods and services with crypto.
So when you buy cryptocurrency, you should keep track of the price you paid. This is the crypto asset's cost basis. The selling price is the disposal price when the crypto is sold. The capital gain is the difference between the selling price and the cost basis.
The fair market value of virtual money in US dollars as of the date of payment or receipt will be demanded of taxpayers. Any gains or losses from a crypto asset held for less than a year are taxed at the highest marginal tax rate applicable to your taxable income.
Any losses can be used to offset income tax up to $3,000 (Dh11,019) in total. Any additional losses might be carried over to the next year.
If the cryptocurrency was kept for more than a year, the appropriate tax rate is substantially lower, ranging from 0 per cent to 15 per cent, or even up to 20 per cent, depending on the individual or combined marital income.
Tax system in Canada, the UK, on cryptocurrencies
Cryptocurrencies, such as Bitcoin, are legal in Canada. You can use digital currencies to buy products and services on the Internet and in stores that accept digital currencies, according to the Financial Consumer Agency of Canada webpage on digital currencies.
Open exchanges, often known as digital currency or cryptocurrency exchanges, allow you to purchase and sell digital currency. Depending on the nature of the trading operations, crypto attracts either capital gains tax or the income tax in Canada.
If the income comes from a business, the entire amount is taxed, however, capital gains are only taxed 50 per cent of the time.
In the UK, individuals who hold crypto assets as a personal investment, mainly for capital appreciation or to make specific purchases, may be subject to capital gains tax when they sell them.
Is there cryptocurrency tax in Australia?
Australia defines cryptocurrency as an asset. The trading stock rules, not the capital gains tax regulations, apply if Bitcoin is held for sale or exchange in the regular course of business.
The sale of Bitcoin held as trading stock in a firm generates ordinary income, and the cost of acquiring cryptocurrency held as trading stock is tax-deductible. Crypto that has been kept for more than 12 months by an Australian tax resident qualifies for the 50 per cent capital gains tax deduction.
This effectively indicates that 50 per cent of the net gain is exempt from taxation. A capital gain tax event will be triggered if crypto is disposed of but not taken from a crypto wallet. Instead of the actual sale price, we'll use the cryptocurrency's Australian Dollar market value on the day of disposal.
Rather, a presumed interest is levied in the Netherlands on the value of all assets minus all liabilities at the start of the tax year. The presumed interest is subject to a flat 31 per cent tax rate in 2021, 30 per cent in 2020.
In Germany, because it does not recognise cryptocurrency as a monetary currency, commodities, or stocks, Germany has been labelled a ‘crypto tax haven’.
Crypto, on the other hand, is considered private money. This distinction is critical since private sales in Germany result in tax benefits. Tax exemption is available for private sales of up to 600 euros (Dh2,619).
Countries that adopted a softer tax stance on Bitcoin and other cryptocurrencies
In Portugal the tax authorities have chosen to adopt a soft stance on cryptocurrency investment. Individuals in Portugal who profit from the purchase and sale of cryptocurrency are not taxed on the capital gains. Further, the exchange of cryptocurrency for other currency is also free of taxation.
The situation differs for companies in Portugal who receive payment in cryptocurrency where normal capital gains taxes apply. The thrust here is that if you are an individual who is paid in cryptocurrency then you can avoid paying heavy capital gains taxes.
Portugal’s tax authorities have stated that “an exchange of cryptocurrency for ‘real’ currency constitutes an on-demand, VAT-free exercise of services.”
In the realm of finance, it is known for Swiss banking standards, which allow for high levels of privacy with low levels of risk. It therefore might not surprise anyone that the country has lenient regulations for crypto investors as well.
However, the unique system of regions divided ‘cantons’ plays heavily into what can and cannot be done. Each of Switzerland’s 26 cantons has its own legal definitions regarding the treatment of cryptocurrency. One Swiss canton may tax cryptocurrency while another may not.
Within each canton the rules that trigger taxation may differ. In Zurich, capital gains from movable private wealth are tax exempt, which could be interpreted to mean that Bitcoin and other crypto could be tax free. However, gains from mining Bitcoin are taxed as regular income.
In Bern, the regulations are stricter and mining and trading are treated as regular income. Lucerne is much more in line with the canton of Zurich and treats capital gains with tax-exempt status.
The Monetary Authority of Singapore, its central bank, takes the view that the cryptocurrency ecosystem must be monitored to prevent laundering and other illegal activity but that innovation must not be stifled.
Singapore Central Bank’s Chief Fintech Officer said in an interview that the city-state’s financial institutions are looking at “allowing crypto to be an experimental construct”.
The Payment Services Act of 2019 regulates Singapore’s legal environment for crypto. The law sets clear expectations that balance regulatory necessities to prevent illegal activity while balancing a growth environment for crypto. Cryptocurrencies are also exempt from capital gains taxes in Singapore.
The small Mediterranean island nation has long been on the radar of crypto investors as many crypto exchanges and block chain projects operate from the country.
There are a few reasons Malta makes strategic sense for crypto-focused companies as well. Malta is a member of the European Union. That means that crypto projects with operations based in Malta can operate freely throughout the entirety of the European Union.
Whether increased regulation comes to the small Mediterranean island remains to be seen. In the meantime, rich crypto investors from non-EU countries will continue to consider it for its 1.5 million euro (Dh6.55 million) citizenship offer and lax attitude toward crypto.
Cyprus is another Mediterranean island nation known for its lax stance toward cryptocurrencies including Bitcoin. Although cryptocurrency is not yet regulated, the country looks to be on such a path.
The Central Bank of Cyprus has flagged the potential for losses and issued official guidelines about crypto risks as far back as 2014. Overall though, things remain fairly wide-open for crypto in Cyprus.
ICOs (initial coin offerings) are the one area of crypto that clearly does currently fall under legal jurisdiction in Cyprus now. Funds derived from ICOs are treated as taxable income in Cyprus. At the same time, Cyprus is noted for its attractive 12.5 per cent corporate tax rate.
The Cyprus Securities and Exchange Commission (SEC) is pushing for more oversight but for now there looks to be no mining restrictions, reporting requirements, and no legal framework for the treatment of cryptocurrencies within estates.
Bermuda’s Digital Asset Business Act 2018 set out its regime for regulating individuals and entities who undertake the following: issuing, selling and redeeming cryptocurrency and other digital assets, operating as a crypto payment provider, including the provision of services for fund transfers; operating a cryptocurrency exchange and providing wallet services; and operating a cryptocurrency services vendor.
All of this simply dictates what constitutes digital business within Bermuda, which levies zero income and capital gains tax. It is often seen as a magnet for individuals and businesses as one of the first regimes for digital business.