Seeking clarity on crypto taxes? It’s a jungle out there! | International wealth tax advisors
Despite the recent “Crypto Winter”, digital assets continue to increase in popularity and adoption. While many cynics have predicted a decline, the fledgling industry appears to be continuing on its growth path – while lacking consumer protections and clear tax rules.
Governments around the world are trying to create and implement regulations around crypto trading, tax collection and consumer protection. While the rules for traditional finance, or “TradFi” are similar in most developed countries, the same cannot be said for digital assets. For example, cryptocurrencies are illegal in certain countries, including China and Saudi Arabia, while regulations in the United States vary from state to state.
The international crypto tax landscape: tax free, taxed or somewhere in between
The global taxation of crypto as a financial instrument is a multitude of rules. Countries like the Cayman Islands, Belarus, El Salvador, Portugal, Singapore and Malaysia are basically tax-free when it comes to crypto. Germany treats crypto holdings as private money – in other words, sales are not taxable if held for longer than a year. In addition, coins sold within one year are not subject to tax if the gain is up to EUR 600. However, getting paid in crypto is subject to income tax, including mining and staking.
Meanwhile, other countries are implementing new tax guidelines. Italy recently approved a 26% capital gains tax on cryptocurrencies as part of its 2023 budget legislation. And crypto miners in Kazakhstan, one of the world’s largest bitcoin mining hubs, will be forced to sell at least 75% of their earnings via registered crypto exchanges.
But while some countries are introducing new taxes, the UK is taking the opposite approach. As part of Prime Minister Rishi Sunak’s plans to transform the country into a crypto hub, the UK announced a tax exemption for foreign investors who buy crypto through local investment managers or brokers.
A myriad of US crypto tax laws and issues
American tax laws are unique in that the government’s right to tax is based on a taxpayer’s citizenship status, while almost all other countries use a domicile-based tax system, where the right to tax is based on a taxpayer’s residence in the country.
At the federal level, crypto is considered property, meaning that sales proceeds are treated as long- or short-term capital gains or losses. But the Internal Revenue Service (IRS) is taking a closer look at crypto holdings and their potential for tax evasion. For tax year 2022, there is now an explicit question on page one of Form 1040 asks: “Have you (a) received (a) at any time during 2022 (as a reward, prize or payment for property or services); or (b) sold, exchanged, gifted or otherwise disposed of a digital asset (or an economic interest in a digital asset)?”
Differences can also be found at the state tax level, where capital gains are taxed at different rates. California is the highest at 13.3%, while several states, including Texas and Florida, have no state capital gains tax. Regarding virtual and crypto taxes, only a few states have indicated how they tax virtual and crypto currencies under their income tax laws.
FTX and worthless securities
The FTX meltdown has left account holders in limbo, given the uncertainty surrounding the firm’s assets. The future of FTX is unclear, as are the amounts that account holders may eventually recover — and with that uncertainty comes the inability to claim the losses on this year’s tax returns. In order for the “lost” tokens to be classified as worthless investments to claim as a capital loss, FTX must be shut down completely.
Tax “stake”
“Staking” is when cryptocurrency owners volunteer to participate in validating transactions on the blockchain to verify the ledger. The process is done by computers in the blockchain network, often via third-party staking services. Investing in cryptocurrency provides passive returns, but it is not without risk, and the tax implications must be clarified. There is not a clear consensus as current US tax policy does not mention staking – one case recently accepted for debate by a federal appeals court.
Background
In 2021, Joshua and Jessica Jarrett were denied a refund request from the IRS on taxes owed for earning wagering rewards. While the agency later offered the refund, the Jarretts followed up with a lawsuit to ensure the problem would not occur again. After a lower court dismissed the case, the Jarrett family appealed, and now crypto software giant ConsenSys is financially supporting the ongoing lawsuit. On “effort” it is forthcoming Ethereum Shanghai update which will allow validators to withdraw 16 million staked Ether.
US cracks down on crypto tax avoidance
Crypto tax rules are very complex and many investors neglect their tax obligations. According to a recent examinationonly 58% of US crypto investors reported crypto holdings on their 2022 tax return. 31% did not report and 11% of the sample size declined to answer.
Cryptocurrency exchanges/platforms are required to collect information from customers so that they can properly issue Form 1099-B at the end of each tax year. However, according to the IRS, crypto exchange Kraken failed to provide the requested information to the agency for transactions exceeding $20,000 between 2016 and 2020. The IRS is now petitioning a district court for an order to enforce the summons.
The crypto landscape is constantly evolving and the tax treatment of assets varies widely. The guidance of an experienced tax advisor well versed in the evolving landscape of cross-border digital asset tax rules can help investors meet their global tax obligations and avoid costly future audits.
