Cryptocurrency Taxation In Mature Economies
Tax avoidance is a serious crime in developed countries. It is usually considered as a kind of injury to the state. It is not surprising that with the popularization of cryptocurrencies, more and more countries make changes in their tax systems. That is why the question of how to pay taxes from cryptocurrency becomes more relevant.
The rise of the crypto sphere has opened vast opportunities for everyone, including criminals, because tracking the flow of digital funds is a difficult task. This is one of the reasons why the discussion of the law on cryptocurrency is on agenda of many governments. Another reason is the lost profit which is due to unpaid taxes on cryptocurrency. At the same time, each nation treats this problem differently, based on the definition of digital assets. Therefore, the understanding of the concept of taxation gives answers to the following questions:
What is the status of cryptocurrency in the country? Is it a means of payment, stocks, or goods?
What type of income does the profit from cryptocurrency trading represent?
How strictly are cryptocurrencies regulated?
For illustration, let's have a look at the problem of cryptocurrency taxation in developed countries, as they set the tone for the rest of the world.
It would be logical to assume that in countries where bitcoin is recognized as an official means of payment, the problem of how to pay taxes from cryptocurrency is already solved: The scheme might be the same as for fiat money. However, the issue is much more complicated. Just look at Japan. The tax rate here is growing by progression: the more you earn, the more you give to the state.
We have already discussed that Japan is one of the few countries where bitcoin has been used as a legal means of payment since 2017. Nevertheless, this does not make BTC a full-fledged currency as JPY. Buying and selling goods for cryptocurrency is equivalent to barter transactions.
The funds received from crypto trading are not considered as capital gains, but as other income. Residents pay from 5% to 45% of tax, and the rate depends on the total amount of other income.
How are cryptocurrencies regulated in Japan? Strictly. All clients of cryptocurrency exchanges must undergo the AML-KYC procedure. Once a year, the exchanges report on changes in customers’ accounts to the FSA — the Financial Services Agency. After that, the FSA transmits data to the NTA — the National Tax Agency.
The German government is more than loyal to digital progress. Until 2015, Germany was even called the most advanced European pro-crypto country. According to the decree of the Ministry of Finance of February 27, 2018, crypto coins were defined as an official means of payment, and all purchases paid in cryptocurrency are not taxable.
However, unlike Japan, the income from crypto trading is considered as capital gains in Germany. The amount of the gains is calculated as the difference between a received amount and invested amount at the rate at the time of withdrawal. The total tax rate on capital gains in Germany takes more than a quarter of the profit amount. But there is an interesting detail.
If an investor holds digital assets for more than one year, the income won’t be taxed. Thus, the German government gave the green light to the holders of bitcoin, ether, and other coins. What’s the point in losing 25% of profit, right? At first sight, this rule seems tempting, but as we know, cryptocurrency is a high-volatile financial instrument. Therefore, holding coins for a year or more is definitely not an option for everyone.
That is how the cryptocurrency taxation looks like in Japan and Germany. The governments have chosen different ways to solve the issue of taxation. However, these developed countries have one thing in common — cryptocurrency there is recognized as an official means of payment. In the next article we'll see how crypto taxation is implemented in other states.