The tax treatment of cryptocurrencies...3 The tax treatment of cryptocurrencies in major countries 4...

The tax treatment of cryptocurrencies

Sangwha Shin

Korea Institute of Public Finance

Feb 22, 2019

Sangwha Shin (KIPF) Feb 22, 2019 1 / 45

Outline

1 Motivation

2 The evolution of cryptocurrencies

3 The tax treatment of cryptocurrencies in major countries

4 The tax treatment of cryptocurrencies in South Korea

5 Conclusion


Outline

1 Motivation




5 Conclusion


Motivation

Why not apply the existing tax treatment to cryptocurrencies?

Similar underlying technology, various applications

cryptocurrencies, utility tokens, tokenized platform, etc

medium of exchange vs. asset

access rights to services, asset, or programs

Anonymity

borderless, instant movement of cryptocurrencies

difficult to enforce tax rules


Motivation

Why not apply the existing tax treatment to cryptocurrencies?

Similar underlying technology, various applications

cryptocurrencies, utility tokens, tokenized platform, etc

medium of exchange vs. asset

access rights to services, asset, or programs

Anonymity

borderless, instant movement of cryptocurrencies

difficult to enforce tax rules


Outline

1 Motivation




5 Conclusion


Types of Cryptocurrencies

Source: www.untitled-inc.com


Types of Cryptocurrencies

Medium of exchange

Acts as a store of value and medium of exchange

Bitcoin, Zcash, Litecoin

Tokenization

Gives rights to other assets, legal tendar, service, platform

USDT, GOLD (assets or legal tendar)

ETH, STEEM (platform, service)

DGO, LKK (share-like)


The evolution of Cryptocurrencies

Bitcoin

aimed to be a medium of exchange without middlemen

1st generation of Altcoins

try to improve functionalities of Bitcoin

Similar to asset-backed securities

Stablecoins: pegged to asset or fiat currencies

securitization of service, asset or networks


Implications

Difficult to define the legal status of cryptocurrencies

Cryptocurrencies are diverging

Better to focus on how it is used

The anonymous aspect of cryptocurrencies can be a threat

The tax administration requires enough information of economic

activities realated to cryptocurrencies


Outline

1 Motivation




5 Conclusion


U.S. - Tax treatment

The taxation rules on ”virtual currencies” of U.S. is summarized in

the notice of IRS 2014 (Notice 2014-21)

applied only to the convertible virtual currencies.(For others, no rules

yet)

Other cryptocurrencies, like utility tokens or securitization tokens, are

not applicable to this notice.

treated as ”asset” for federal tax purposes


U.S. - Tax treatment

Recieved virtual currency in return for goods or service → fair market

value should be included in computing gross income

mined virtual currency → fair market value of the day it is mined

should be included in computing gross income

Business mining → self-employment income

Sale or exchange → capital gain (capital asset) / ordinary gains

(inventory)


U.S. - Regulations

Financial Crimes Enforcement Network(FinCEN) 2013

Scope: Virtual currencies works as a medium of exchange

exchanger: a person engaged as a business in the exchange of virtual

currency for real currency, funds, or other virtual currency

administrator: a person engaged as a business in issuing a virtual

currency, and who has the authority to redeem

user: a person that obtains virtual currency to purchase goods or

services


U.S. - FinCEN 2013

An administrator or exchanger is an Money Services Businesses

(MSB), specifically, a money trasmitter

subject to MSB registration

report suspicious transactions

keep records


U.S. - Treasury Inspector General for Tax Administration

Three recommendations to the IRS

develop a coordinated virtual currency strategy in the IRS

provide updated guidance to reflect the necessary documentation

requirements and tax treatments needed for the various uses of virtual

currencies

revise third-party information reporting documents to identify the

amounts of virtual currencies used in taxable transactions


U.S. - Tax administration of IRS

IRS collects user information of virtual currency transactions from

exchanges

send out reminders

compliance campaigns

IRS uses a John Doe summons to exchanges

request information about U.S. taxpayers who conducted transactions

in a virtual currency from 2013 to 2015

U.S. taxpayers with more than 20,000 USD account

ID, name, date of birth, address, transaction history, etc


Japan - Income tax

Incomes generated from cryptocurrencies are classified as business

income or miscellaneous income

exchanges, acquired in business transactions −→ business income

personal purpose −→ miscellaneous income

Both are under comprehensive tax rate, 5-45%

Mining income, new coins from the fork


Japan - Consumption tax

From 2014 to 2017, cryptocurrencies are under the consumption tax

treated as commodities

From July 2017, cryptocurrencies are exempt from the 8%

consumption tax


Japan -Other issues

On going discussion on lowering the income tax rate (5-45% → 10%)

and allowing the deduction carried forward for losses

More detailed method of evaluation will be included in the tax law

revision in 2019


Japan - Regulations

Exchanges are required to register to the Financial Services Agency

Obligations of exchanges

System risk management

User information management

Transaction keeping obligation

suspicious transaction reporting

The self-regulatory status of the cryptocurrency industry (2018.10.)

permit the Japan Virtual Currency Exchange Association to police and

sanction exchanges for any violations


Japan - Tax administration

NTA recomment the exchanges to issue the annual report to

customers for transactions after 2018.1.1.

This annual report will be issued in electronic form, which can be

directly used for a software program provided by the National Tax

Agency

Exchanges also issue the ”certificate of balance” for ”inheritance tax

report” purposes


Japan - Tax administration

From 2019, high-income and asset taxpayers should report the

blances of cryptocurrencies by type, usage, maket prices

The National Tax Agency can acquire the personal information of

users from exchanges


Canada - Income tax

Canada Revenue Agency(CRA) treat cryptocurrencies as commodity

in income tax act (2013)

using cryptocurrencies to purchase goods or services would be treated

as a form of barter transaction

Income related to business → ordinary income, 15-33%

comprehensive tax

Income not related to business → capital gain, only 50% of capital

gain will be under 15-33% comprehensive tax rate


Canada - GST

Cannot find the official tax guidelines for GST

Generally, financial services are exempt from GST. But,

cryptocurrencies are treated as commodity.


Canada - Regulations

Gazette, Part I, Volume 152, Number 23

implement a full compliance program and register with Financial

Transactions and Reports Analysis Centre of Canada (FINTRAC)

record-keeping and reporting obligations

in the case of a transaction of $1,000 or more, the name, address and

telephone number of the person or entity that requests the exchange,

the nature of their principal business or their occupation and, in the

case of a person, their date of birth;


Canada - Regulations

Three recommendations from House of commons (Standing

Committee on Finance / 2018.11.)

1) crypto-exchanges as money service businesses (MSB)

2) regulation on crypto-wallets; proper identification is required, true

ownership of wallets is known to the exchanges

3) establish a license for crypto-exchanges / anti-money laundering

program (the State of New York’s program as a model for best

practices)


Canada - Tax administration

The CRA can request information from cryptocurrency related

organizations with a court order

Taxpayers are required to report the CRA if they own specified foreign

property (including cryptocurrencies) that in the aggregate cost more

than $100,000


German - Income tax

If the mining is an occasional activity → miscellaneous income

If cryptocurrencies are acquired or produced as part of profit-making

commercial activity → business income

The exchange of cryptocurrencies into euros or another

cryptocurrency → it leads to private sale, taxable transaction


German - VAT

The judgment of the European Court of Justice(ECJ) in 2015

The exchange of conventional currencies into the virtual currency and

vice versa falls under the exemption in VAT Directive

If the cryptocurrencies will be exchanged for traditional currencies, the

transactions constitute the supply of services

However, those are treated as transactions under the provision of

”currency, bank notes and coins used as legal tender”, which is exempt

from VAT


German - Regulations

BaFin classifies Cryptocurrencies as one type of financial product,

”units of account”

Business related to cryptocurrencies are required to get authorisation

from BaFin

New tokens in the ICO may not be classified as units of account.

Tokens can be security, share, or capital investment. Case by case.


German - Regulations

Gemany follows 5th anti-money laundering directive in 2018, which

includes new rules related to cryptocurrencies.

EU countries need to revise their law system accordingly by 2020

Providers engaged in exchange between cryptocurrencies and fiat

currencies, custodian wallet providers are added as the obliged entities

Restrict anonymity: exchanges, wallet providers should be registered

Financial Intelligence Units(FIUs) should be able to obtain information

to associate cryptocurrencies addresses to the identity of the owner of

cryptocurrencies to combat the risks related to the anonymity


Australia - Income tax

Guidance from Australian Taxation Office (ATO) in 2014; more

detailed guideline in 2018

Cryptocurrencies are considered as property for tax purposes

Businesses related to exchange, sale, and mining of cryptocurrencies →

ordinary income

Gains from disposing cryptocurrencies for personal uses → capital gain,

comprehensive tax

less than AUD 10,000 will be disregarded


Australia - GST

Cryptocurrencies are not subject to GST form 1 July 2017

Cryptocurrencies are treated the same way as physical money for GST

purpose

Prior to 1 July 2017, consumers who use cryptocurrencies can bear

GST twice : Once on the purchase of the cryptocurrencies and once

again on its use in exchange for other goods and services subject to the

GST


Australia - Regulations

On 3 April 2018, Australian Transaction Reports and Analysis

Centre(AUSTRAC) commenced regulation of cryptocurrency

exchanges

All cryptocurrency exchanges must be registered with AUSTRAC

identify and verify the identities of customers

report suspicious transactions involving physical currency that exceed

AUD 10,000 or more


Australia - Tax administration

The ATO is entitled to access to AUSTRAC information

The ATO announced that they will use 100-point identification

checks and data-matching technologies

100-point identification: more detailed checks on identities

data-matching: matches the ATO’s information with other data


Summary

Table: Summary - tax treatment

CountryIncome Tax VAT

classification tax rule classification tax rule

U.S property business income / capital gain - -

Japan commodity business income / miscellaneous income means of payment exemption

Canada commodity business income / capital gain unknown unknown

German private capital asset business income / capital gain means of payment exemption

Australia property business income / capital gain currency exemption


Summary

Table: Summary - Regulations

Country report obligation of taxpayer anti-money lanundering on exchanges

U.S yes (asset) yes

Japan yes (2020 ) yes

Canada yes (100,000 CAD ) yes

German - yes

Australia - yes


Outline

1 Motivation




5 Conclusion


Legal status

There is no agreed legal status of cryptocurrencies.

Currency: The Korean government made it clear that cryptocurrencies

are not a legal tender

Financial product: Only securities and derivatives are belongs to the

financial product in the current law

Asset: The economic value of Bitcoin has been recognized by the court

(Intangible property).


Studies on tax treatment of cryptocurrencies

There is no official statement from the government.

Many studies on this topic. Most of them focus on tax on capital gain

and ‘value-added tax.

No disagreement on using the existing tax rules of the corporate

income, inheritance, and gift


Capital gain tax

The current capital gain tax rules lists types of incomes

Some studies argue that the income from buying/selling

cryptocurrencies are not taxable as it is not on the list

The revision of tax law in this regard is expected in many studies


Value added tax

Some studies interpreted the cryptocurrencies as intangible asset,

which is under the VAT

On going debates, but currently there is no VAT on

purchasing/selling cryptocurrencies


Other regulations

The anti-money laundering regulations on the financial institutions

Enhanced checks on identities

Obligations to report suspicious transactions

The anti-money laundering regulations are not directly on the

business related to the cryptocurrencies

ICO is forbidden / No margin trading in exchanges


Outline

1 Motivation




5 Conclusion


Summary

The tax rules of the major countries are similar to each other

provide guidelines to the cryptocurrencies that can be used as a

medium of exchange

existing tax rules can be applied to the asset-like cryptocurrencies

Stablecoins should be reviewed to apply the existing tax rules

(case-by-case)

Needs regulations to control for the anonymity

regulations on the crypto-exchanges are required

regulations on wallet-providers

The international cooperation is very important to deal with fully

anonymous cryptocurrencies


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