The age of digital technology is developing rapidly and very often humanity does not notice how technology penetrates into our lives. If we look at the history of Bank cards, many of us (including me) may be surprised that the first Bank card appeared in 1951!

I will give a short chronology of the events of the development of Bank cards:

• As we already know, the first Bank card appeared in 1951, it was issued by Long Island Bank in New York.
• Already in 1964, Japan creates its own system of payment Bank cards JCB (Japan Credit Bureau).
• In 1967, the world’s first ATM, which was established by Barclays Bank, appeared in London.
• In 1980, the first national ATM networks appeared in Japan, the USA, and Europe, and Citibank became the world’s largest Issuer of Bank cards.
• In 2002, MasterCard created the first contactless card (on a chip) PayPass.
• And in 2005, MasterCard and VISA create a common standard for contactless payment cards.

The technological paradigm is constantly evolving and changing, we can see that the bank card system is imperfect, it is becoming obsolete and cryptocurrency is coming to replace this technology.

Today we see the rapid spread of cryptocurrencies around the world and we see how actively Bitcoin and any other cryptocurrencies penetrate into the life of all mankind.

I will not talk about the history of the emergence of Bitcoin, but I want to discuss some aspects of the taxation of cryptocurrencies (virtual currencies) in different countries and why they need it.

Currently, there is no international standard for the taxation of transactions with cryptocurrencies and therefore different countries independently establish taxation rules.

Usually, States do not create new methods of taxation for cryptocurrencies but use old methods of applying taxes, which are used by the established system for years.

For example, the tax service of Luxembourg in 2018 issued a directive order (circular) and approved the procedure for taxation of cryptocurrencies. The basic rules and regulations in this document state that:

• cryptocurrencies are not real currency;
• for taxation, cryptocurrency should be considered as an intangible product;
• income or profit, which is received from operations with cryptocurrencies, depending on the nature and type of activity, is considered either income from a commercial activity (business), or refers to “other income”.

Let us dwell on Luxembourg, because in this country, for example, the system of taxes and fees from cryptocurrency activities is already working.

Luxembourg’s circular also says that earning income in cryptocurrency does not affect its taxation. Any transaction with cryptocurrency for tax purposes must be converted to Fiat currency (Euro) or other convertible operating currency. Therefore, it is impossible to reflect any values in cryptocurrency units in the tax return.

The system of taxation of operations with cryptocurrency depends on the “nature of income”, that is, the origin of such income. It follows that the income that has been derived from an independent and permanent activity for the purpose of profit is part of the overall economic life, so such profit is considered income from entrepreneurial activity (business). For example, an entrepreneurial activity (business) can be called cryptocurrency mining, the creation, and maintenance of online cryptocurrency exchanges, as well as the automatic distribution of cryptocurrencies.

IMPORTANT!

It is necessary to distinguish between commercial activity (business) and personal wealth management. The main and most common signs of entrepreneurship in the world are:

• Availability of premises and infrastructure that are used exclusively and only for operations with cryptocurrencies;
• Use of borrowed funds or loans;
• Rapid changes in the volume of stocks (savings) of cryptocurrencies;
• Trading on behalf of third persons, etc.

Incomes of a legal entity (commercial organization) in cryptocurrency are considered entrepreneurial and are taxed at a rate of 26.01% (Luxembourg). Cryptocurrency itself is a taxable asset for tax purposes on the net assets.
This tax is levied on legal entities only.

The income in the cryptocurrency of an individual is taxed according to the rules of entrepreneurial income (progressive taxation scale with rates up to 42%, minus the fund for providing employment and municipal income tax with a rate of 6.75%) only when income is received in the context of entrepreneurial activities. If the income of an individual is received not as a result of entrepreneurial activity, but as a result of managing the personal state of such an individual, then most likely such a tax will be governed by rules that refer to “other income”.

Thus, if an individual sells a cryptocurrency less than 6 months after its acquisition/purchase, then the profits and losses will be considered as profits and losses from speculation. If it is impossible to determine or establish the exact purchase price of a cryptocurrency, then the circular requires applying the method of the weighted average price. If it is impossible to define cryptocurrency operations as a type of commercial activity, then, for example, mining income may be in the category of “other income”.

If an individual is not engaged in entrepreneurial activity, his cryptocurrency income is taxable if the speculative profit exceeds 500 Euros per the calendar year.
Another condition is the sale of currency no later than 6 months after its acquisition with the receipt of benefits. The taxpayer is obliged to have on hand documents relating to the date of purchase or creation of virtual currency, as well as to the relevant costs. The burden of proof lies with the taxpayer. If according to the taxpayer’s documentation it is difficult or impossible to establish the exchange rate, the price of the currency being sold is determined on the basis of the weighted average price. If mining does not meet all business criteria, it may be subject to other income taxation rules.

The circular is intended for cryptocurrency investors, as well as miners and operators of cryptocurrency platforms. In principle, circulars are in the nature of an explanatory note (explanation), which is mandatory for tax authorities, but not for taxpayers. But taxpayers are encouraged to use it, based on the principle of good faith and honesty.

New priorities of the tax authorities ‘ verification work (USA)

The US Federal Tax Service has announced that it has launched new “campaigns” of verification work, one of such campaigns is dedicated to cryptocurrencies.

The US Federal Tax Service considers cryptocurrency a property. This means that transactions with cryptocurrencies must be taxed. For example, a taxpayer that sells its goods or services for a cryptocurrency is required to disclose the market value of the cryptocurrency in us dollars on the date of its receipt in order to calculate its revenue. A taxpayer who bought a product or service for this cryptocurrency is obliged to take into account the profit or loss in the ratio between the value of the currency and the market value of the product or service.

Also, the object of taxation can be a simple operation of exchange of one cryptocurrency for another. For example, a taxpayer bought Bitcoin in 2015 for the amount of 1 thousand dollars, and exchanged them for Ethereum in 2018, when the exchange rate was 12 thousand dollars for one Bitcoin. In this situation, the taxpayer must provide a report on capital growth in the amount of 11 thousand dollars and pay tax on this amount, even if the dollars he did not hold.

So far, various “campaigns” of the US Internal Revenue Service have concerned the verification of compliance with “international tax regulations” by individuals sending or receiving money from abroad, as well as by foreign individuals who have business relations with the US. Therefore, any operations with cryptocurrency related to the international transfer of us dollars may also be of interest to the tax authorities.

According to various experts, the tax authorities will pay attention to and monitor the activities of cryptocurrency deals:

• individuals who spend, transfer or exchange cryptocurrency;
• legal entities that pay remuneration in cryptocurrency to individuals for individual services;
• individuals who receive remuneration in the form of cryptocurrency for the provision of individual services.

An individual or legal entity that has not declared a significant (large) amount may use the voluntary disclosure program to reduce the amount of the fine. This program cannot be used by taxpayers for whom a tax audit is already underway.

Problems for miners (USA)

For many entrepreneurs, cryptocurrency mining has become a successful business (mining on an industrial scale). However, mining is a business that requires large investments in complex computing systems and expensive resources.

The Federal Tax Service of the USA recognizes revenues from mining to the category of entrepreneurial income. The problem is that this applies even to small miners: any person who received more than 400 dollars in a calendar year with the help of mining is obliged to provide a report on their activities to the tax authorities.

Such income is subject to accounting at the market value of the cryptocurrency at the time of its receipt. A person who independently owns mining equipment is obliged to submit a Declaration of their income from mining as income from self-employment. Income specified in the Declaration is subject to the usual tax collection on the income plus income tax on private entrepreneurs (at the rate of 15.3%).

In order to reduce the tax amount, the miner can create a legal entity (company). In this case, he will become the owner of the company, which is equipped with mining farm equipment. With an increase in the amount of income from mining, the tax levy of such a legal entity is more profitable for the taxpayer than the taxation of an individual. If the amount of net profit per year exceeds 60 thousand dollars, the taxpayer would be more profitable to create a so-called S-Corporation or limited liability company (LLC), which is taxed under the rules of S-corporations. S-Corporation allows the miner to be exempt from tax on the profits of private entrepreneurs at a rate of 15.3% for part of the income from mining. In industries with high costs, which include cryptocurrency mining, the tax benefit from the establishment of an S-Corporation can be very significant. However, it may be even greater if the taxpayer uses a different legal form of enterprise than the S-Corporation. It depends on the peculiarities of the legislation of the state where the business is registered and carries out economic activities.

It is important to know that the chance of a tax audit of a legal entity in the United States is lower than that of a private entrepreneur.

The main item of the cost of mining any cryptocurrency is the cost of the acquisition and maintenance of equipment, as well as electricity. A miner who lives in the USA in a region with a deregulated electricity market is recommended to look for a more favorable tariff. The fact is that the difference in the price of electricity of only a few cents per kilowatt-hour can be decisive for the economic result of the miner’s activity: it may depend on this price difference whether the miner will receive a profit or suffer only losses.

Mining cryptocurrency is associated with the consumption of large amounts of electricity when using mining farms. Miners whose equipment is located in the area with expensive electricity, have the opportunity to deduct the cost of electricity from the total amount of their income. For miners who spend thousands of dollars a year on electricity, a deduction of expenses can provide substantial savings on taxes. Higher quality equipment makes it possible to increase the energy efficiency of mining. However, such equipment is more expensive.

Miner has the right to deduct equipment amortization from taxes. The use of special rules for amortization of equipment makes it possible to ignore the full cost of equipment in the year of its purchase.

Crypto business or investment (USA)

The purpose of mining is to provide blockchain with the necessary resources, which at the same time brings profit to miners. This profit often largely determines the market value of the received (mined) cryptocurrency. The miner can get both profit and loss.

The result of the miner’s activity is determined by the market situation, so he needs to be well versed in computer technology and at the same time be an experienced investor.

Usually, miners throw their resources on the mining of cryptocurrencies, which give a good profit. Mining some cryptocurrencies gives miners more profit than other cryptocurrencies. Sometimes miners exchange the mined cryptocurrency for another, in which they prefer to store the value they have created. With this exchange, the miner actually sells the first cryptocurrency. Cryptocurrency exchange operations provide short-term or long-term capital gains or losses. Such transactions shall be recorded in a special form of tax reporting (Form 8949).

Long-term capital gains are taxed at lower interest rates and relate to cryptocurrencies with a retention period of more than 1 year. Short-term capital gains are taxed at higher interest rates of ordinary income tax.

Thus, there are many methods of tax accounting that allow you to optimize the taxation of transactions from the sale of cryptocurrencies extracted by mining equipment.

Growth in the number of taxpayers (Japan)

The tax Service of Japan in 2018 announced a new system, the purpose of which is to expand the range of taxpayers — individuals and legal entities that submit declarations for income in cryptocurrency.

The simplified method of tax Declaration will make it possible to automatically calculate the profit from the sale of cryptocurrencies. Companies are advised to use specialized software that will automatically do the calculation of profits and losses in cryptocurrency. The system allows simplifying the procedure of payment of taxes.

Most of the difficulties in calculating the profit from the sale of cryptocurrencies are due to the difference in methods of storing data on different cryptocurrency exchanges. The tax service of Japan intends to solve these problems by launching systems that will automatically calculate profits and losses. The tax administration of Japan would be to advertise these services to prepare tax statements on Bitcoin and other cryptocurrencies revenue, especially companies in the IT industry.

According to the position of the Japanese tax authorities, the profit from the sale of cryptocurrency must be taken into account as “other income”. Employees of companies that receive a salary in a cryptocurrency are required to file a tax return if this year they earn an amount equivalent to more than 200 thousand yen (about 1,800 dollars).

Control of cryptocurrency traders (Australia)

The Australian tax Administration plans to start controlling cryptocurrency investors. To track the fulfillment of tax obligations by cryptocurrency traders, the Australian tax service is going to use international information exchange agreements.

With the aim of preventing money laundering, the new rules require the collection of the cryptocurrency exchanges of information on transactions that the tax authorities will be able to use. Users of cryptocurrencies in Australia can be ill-informed about tax obligations. People may think that their income is not taxable, although according to the laws of Australia, cryptocurrencies must be declared.

Experts point to a number of technical issues for which the Australian tax service does not provide any instructions or explanations. For example, Initial Coin Offering (ICO), the tax authority has no recommendations regarding their taxation. The Australian tax service does not provide instructions regarding the taxation of cryptocurrency investors. I believe that this is a big problem that puts “new cryptocurrency participants” in an uncertain position.

Countries are seeking to introduce cryptocurrencies into existing tax systems. However, many issues remain unresolved. Apparently, the authorities of different countries will improve the tax system gradually/step by step as the principal problems are solved.

I hope that cryptocurrencies and activities in this area will be improved at the state level, and the governments of all countries of the world will not create obstacles to humanity in the development of blockchain technologies.

The cryptocurrency revolution has already occurred and there will be no reverse process.

Material developed by the Legal Department of EdJoWa Holding