The global battle for Bitcoin tax compliance

bitcoin tax compliance

23rd December 2022

The arrest of 30-year-old Sam Bankman-Fried, the Bahamas based US entrepreneur and founder of FTX, the crypto exchange, who stands accused of defrauding investors, has once again pointed the spotlight on virtual and digital currencies. Indeed, the taxation of crypto assets has been on the agenda of global governments and tax authorities who want to ensure that the correct income and capital gains tax from digital transactions are registered for tax purposes. In this blog, we round up some of the latest developments in the taxation of crypto assets around the world.

The European Union (EU) is eager to ramp up its regulation of the crypto industry in 2023, recently announcing that it will require companies operating in digital and virtual crypto currencies to report the holdings of their users to local authorities. Under the proposed new tax rules, otherwise referred to as the eighth Directive on Administrative Cooperation or ‘DAC8’, the EU is on a mission to put a stop to digital tax evasion, which is costing member states billions of Euros. The intent to recoup tax income is such that companies based outside the EU could be made to register with local authorities.

The scale of the problem has led the EU to take action in a bid to get a handle on an ever-growing problem. “Anonymity means that many crypto asset users making significant profits fall under the radar of national tax authorities. This is not acceptable,” said Paolo Gentiloni, the EU Commissioner for the Economy. It is not yet clear how the measures will be enforced for those companies outside the EU but on this point he went on to add, “We will work on that. What counts for us is that EU residents are targeted by these measures even if they use crypto providers from elsewhere”.

The measures are designed to beef up the regulation of cryptocurrency markets across the EU and counter a practice called ‘reverse solicitation’. This is where a third party firm, including UK based companies, promote or advertise their investment services or activities to acquire EU customers, which should fall under the scope of local taxation requirements and regulations. One of the biggest challenges faced by European regulators is that many companies operating in virtual and digital currencies are predominantly online and it is hard to prove where they are headquartered, if at all.

The proposals, which also target some providers of non-fungible tokens (NFTs), have been met with mixed reaction. Some have commented that the 38 member countries of the Organisation for Economic Cooperation and Development (OECD) are already making progress on tax evasion in overseas bank accounts and that this is a logical and necessary step to make inroads into the crypto market. The European Crypto Initiative on the other hand has voiced its concern that it could extend beyond what is covered by the European Parliament’s Markets in Crypto Assets (MiCA) regulations.

Capital gains from crypto taxes

In country news, Italy revealed plans in its December budget documentation that it would be introducing a crypto capital gains tax of 26% in 2023, which will only apply to profits in excess of €2,000. Should the bill of Prime Minster Giorgia Meloni’s government be passed, those who declare their digital currency holdings as of 1 January 20023 will pay a reduced 14% tax on their profits. According to TripleA data, over 1.3m Italians own crypto currencies, or 2.26% of the population. Exchanges like Binance, Coinbase and have all obtained licenses to operate in the country.

Given that digital assets were previously not recognised as legal tender, the crypto friendly Portuguese have also addressed the taxation of cryptocurrencies. Proposals in its 2023 budget include the introduction of a 28% capital gains tax for those holding assets for less than one year, specifying that taxation would be exempt after the one year threshold. Furthermore, a 4% levy will be imposed on transfers of virtual assets, for example for the purposes of inheritance. A commission tax on crypto brokers and intermediaries involved in crypto trading will also be brought in.

The tightening of crypto taxation rules have been replicated in other countries around the world. Germany, which has always been very active in the crypto markets, is also ringing the changes. Following tax guidance released by the country’s Federal Ministry of Finance in 2022, it too has decided to not tax crypto currencies such as Bitcoin when assets are held for over a year. Meanwhile, India’s government has imposed a whopping 30% capital gains tax on crypto transactions, making it one of the highest world rates. The country’s exchanges have seen a notable decline in trading activity.

The UK recently confirmed that it would be extending tax breaks and tax relief for investors, encouraging them to use UK based investment managers to cement the UK’s standing as a crypto hub. Measures laid out in the government’s 2022 plan include a ‘financial management infrastructure sandbox’ to help boost innovation, the recognition of digital currencies such as Stablecoins as a form of payment as well as a collaboration with The Royal Mint on an NFT. The Financial Conduct Authority (FCA) held its first ‘CryptoSprint’ in May 2022 to increase its understanding of the crypto market.

As we’ve seen in our latest update, governments and tax authorities around the world are looking to make unprecedented progress in the taxation of crypto, virtual and digital currencies in 2023. Tax fraud is costing treasuries billions in lost tax income as countries try to increase transparency and introduce tax laws to ensure that they can collect the taxes due. It is important that companies placing international contractors abroad are aware of the latest local regulations should they use or intend to use crypto as a form of payment for goods but also as financial incentives for their employees.

If you’re unsure about any of the matters discussed, our 6CATSPRO experts can guide and advise you.

6CATSPRO is part of WorkwellTM Group

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