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Crypto tax regulations accelerate on increased adoption

By Mensholong Lepcha

07:41, 16 December 2021

Bitcoin illustration with a US tax form 1040
Bitcoin illustration with a US tax form 1040 – Photo: Shutterstock

Increased adoption of cryptocurrencies and blockchain technology components such as non-fungible tokens (NFTs) and decentralised finance (DeFi) has prompted governments across the world to address cryptocurrency taxation policies.

Audit firm PwC in a report said events such as the adoption of cryptocurrencies as legal tender in El Salvador will require tax authorities that have previously been silent on the cryptocurrency taxation guidance to issue legislation.

“Unsurprisingly, the number of jurisdictions with crypto tax guidance issued has continued to rise as tax authorities realise that individuals and businesses alike need guidelines to be aware of how to meet their tax obligations,” said the PwC Annual Global Crypto Tax Report 2021.

Cryptocurrency tax reporting requirement

In mid-November, US President Joe Biden signed a $1trn infrastructure bill containing a cryptocurrency tax reporting requirement.

The inclusion of definition of “digital assets” and introduction of obligations for “brokers” to report on digital assets sales and transfers in the infrastructure bill is seen as a harbinger for major regulatory initiatives to come.

Few US states have addressed cryptocurrency and cryptocurrency transactions in state sales and use tax laws, while issuing guidance that treat cryptocurrency as a medium of exchange, according to PwC’s report.

PwC Crypto Tax Index

US states are yet to issue guidance on cryptocurrency activities such mining, air drops and hard forks, PwC added. Meanwhile, emerging technologies such as NFTs “may potentially be subject to state sales and use tax under existing state sales and use tax frameworks,” PwC said.

The US missed out on top 10 spots, taking the 14th spot, in the PwC Crypto Tax Index ranking which assessed the most comprehensive cryptocurrencies tax policies issued by governments across the world.

The UK, ranked 11th on PwC’s list, differed on cryptocurrency perception from the US with Her Majesty's Revenue and Customs (HMRC) considering crypto assets “more equivalent to a commodity” and not as currency or money, according to PwC.

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Liechtenstein tops ranking

Tiny European principality Liechtenstein held onto the top spot in the PwC Crypto Tax Index for the second year in a row in 2021, while six out of the top 10 nations came from Europe.

According to the report, Germany took the biggest leap climbing to fourth place from 20th last year.

Earlier in June, Germany’s Finance Ministry issued a first draft on direct taxation of cryptocurrencies with most pressing topics being “non-existent statements for how to declare crypto gains/losses to the tax authorities”, taxation of staking and “rebuttable presumption for mining to be a commercial activity,” according to PwC.

El Salvador yet to introduce formal crypto tax guidance 

Australia was ranked joint second with Malta. The Australian Taxation Office published its guidance on income tax treatment of investing and trading in cryptocurrencies as early as December 2014, PwC said.

“Under the current Australian income tax rules, cryptocurrency is not viewed as money or foreign exchange but rather a capital gains tax asset or as a revenue asset, like shares or property, with the character of the asset depending of the intention of the holder. While a digital wallet can contain different types of cryptocurrencies, each cryptocurrency is a separate asset,” read the report.

Elsewhere, central American nation El Salvador, which is inarguably the leading early adopter of cryptocurrency after making bitcoin legal tender in 2021, ranked 24th ranked nation in terms of cryptocurrency taxation policy comprehensiveness.

“Interestingly El Salvador, which legalized Bitcoin as legal tender in 2021, still does not actually have formal guidance on how digital assets should be taxed, but their Bitcoin Law did exclude Bitcoin / US$ transactions from capital gains taxes,” PwC added.

Read more: Powell: Crypto is a risk to investors, but not the economy

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