Have you recently acquired, exchanged or sold a financial interest in virtual currency, be it bitcoin or some other digital token? If so, lawmakers and tax agencies in the U.S., U.K., Denmark, Brazil and other countries want you to know this: faithful records must be maintained in order to calculate your tax liability at the end of the financial year. No excuses.
Earlier this year, both the Internal Revenue Service (IRS) and Her Majesty’s Revenue and Customs (HMRC) sought to drive home this message, dispatching letters to taxpayers suspected of tax evasion as well as pressuring major exchanges such as Coinbase and CEX.io to reveal customers’ names and transaction histories. As well as petitioning individuals and exchanges, tax investigators have been known to comb social media platforms, search for incriminating blogs and review forum conversations to hold crypto holders to account. Never before has there been such a concerted, committed effort on the part of tax agencies to gather information about citizens’ digital currency holdings.
Cryptocurrency Tax Basics
Needless to say, each country’s treatment of cryptocurrency taxation differs – often significantly. Indeed, there are several bitcoin-friendly nations which do not tax crypto-holding individuals at all, including Singapore and Portugal. However one wonders whether processes will be tightened in the coming years, as governments start to comprehend the revenue they might conceivably receive by enacting stringent cryptocurrency legislation.
While it is worth pondering the official guidance if you have conducted transactions in recent years, there are some broad principles you should be aware of. Firstly, if you have sold cryptocurrency – whether via an official exchange or in person – you must make a record of the transaction. If such an event resulted in a capital gain, it is necessary to pay the appropriate tax. This holds true for many of the countries which are now vocally seeking to enforce robust crypto tax compliance. Failure to obey these mandates is likely to provoke a stiff penalty, proportionate to the size of the capital gain. Penalties could also be enforced if the information you supply is inaccurate or incomplete.
Incidentally, individuals who have suffered a capital loss are entitled to a tax deduction: the important thing is to observe the reporting process, the same way you would if you transacted stocks and securities. Needless to say, it can get pretty complicated – which is why it’s worth investing in bitcoin tax software to aggregate transactions, track cost basis and calculate your liability from month to month.
While cryptocurrencies such as bitcoin and ether are often treated as investment assets, an increasing number of people – particularly employees and independent contractors working in the cryptoconomy – receive payment for labor not in fiat but in crypto. It should come as no surprise that such earnings entail tax obligations, specifically income tax. And if you cash out your wages at a later date, after the price jumps, you’re on the hook for the aforementioned capital gains. Again, crypto-specific accounting software can simplify the process to a large degree.
Cryptocurrency Tax Laws Are Still Evolving
Although governments around the world are getting to grips with cryptocurrency, it’s fair to say clearer crypto tax laws are likely to be rolled out in the years ahead. This was perfectly illustrated by the head-scratching of U.S. Congress members who recently petitioned the IRS to supply additional clarity on cryptocurrency tax laws, noting that “recent guidance creates many new questions related to the topics it seeks to address, namely forks and airdrops.”
Some commentators also believe bitcoin tax laws should include a de minimus exception, whereby crypto owners become immune to tax on transactions below a specified threshold. Others contend that crypto-to-crypto exchanges should be covered by like-kind exchange tax exemptions, which allow for the disposal of an asset and the acquisition of another without triggering a tax liability.
Whether or not such amendments come to pass, we can say with confidence that the resources and tools governments wield to identify crypto transactions, and consequently collect the applicable taxes, are likely to improve in the short and long term – and will do so at a quicker rate as crypto transactions become more valuable.