Taxation of Virtual and Crypto Currency Transactions: Global Review-2021

In this article, we review recent findings and trends in the taxation of virtual currency transactions across the world.  

The COVID-19 pandemic that triggered the global lockdown and recession has prompted the expansion of blockchain products, services, and new solutions. Virtual assets have earned a growing interest from institutional investors, SMEs, sole proprietors, everyday consumers. Regulators have taken to revise their laws and tax treatment of incomes derived from the use of virtual currencies. 

The benefits of virtual and crypto currencies have become more prominent last year. They create a huge potential for e-commerce and retail, peer-to-peer payment, trading, cross-border remittances and can revolutionize practically every sector. Some of them include:  

• low transaction costs 
• fast and easy payments 
• reduces fraud risks 
• easy 24/7 access online 
• practically borderless
• more privacy
• more competitive innovations emerging every day
• penetration into every sector of the economy
• excitement and novelty of the new prospects and niches for business.

The cryptocurrency and blockchain business hubs are located in different parts of the world. Interestingly, while Ukraine, Russia, Venezuela, China, top the list of countries with the biggest usage of virtual currencies, they are not the centers of crypto business.

The top 5 communities where the biggest number of crypto startups mushroomed last year were in Silicon Valley, London, NYC, Singapore, Los Angeles.

Foreign companies, though, are often discouraged from setting up their projects in such thriving destinations. Why so? Because, for example, their access to the services of local banking institutions is challenging, or they face other complications.

New players often feel discouraged to base their crypto companies at home either because of 

• the lack of clear rules, incentives, support; 
• gaps or inconsistencies in the national regulations and taxation policies; 
• challenges in some practical matters of running a business.

What do new players do? Where do they go?

They (and their funds) head for such destinations as the British Virgin Islands, Gibraltar, Nevis, and other jurisdictions, where specialized banking, audit, custody, legal services are more accessible, affordable, and of decent quality. 

Moreover, some of these destinations offer many incentives for foreign investors, as you know from articles published on our portal. 

If you want to know where your crypto business could feel at home, we should talk. InternationalWealth renders assistance and services of professional experts in choosing jurisdictions, opening bank accounts, obtaining the necessary licenses for crypto businesses. Please write to our e-mail above, or click the link given below, and tell us about your areas of interest.

Last year, many countries significantly refined (or decided to revise) their legal frameworks for the use of virtual currencies as means of exchange. At the same time, several international research teams tried to detect global trends in the field of taxation of virtual currency transactions. Though there are many uncertainties at the national regulators’ levels, the first immediate conclusion is that virtual currency is a global phenomenon.

What is a virtual currency transaction?

When you need to find information about taxes, laws, banking for your crypto business, what terms do you type into the search box or search engine online? Most often, it takes some time to accept that the words ‘virtual’, ‘electronic’, ‘digital’, ‘crypto’ are broadly interchangeable.

Since the birth of ‘Bitcoin’ in 2008,  more than a dozen different almost synonymous terms appeared in the ‘crypto speak’ to define the phenomenon of ‘virtual currency’. Here is a list of terms and countries where they are most frequently used: 

• Bitcoin (NGA, MUS, ZAF, NAM, ZWE, CAN, USA, MEX, NIC, CRI, JAM, TTO, ARG, BRA, CHL, COL, KGZ, UZB, VEN, CYP, RUS, ISR, IRN, TUR, etc.)
• Cryptoasset / crypto asset (DEU, GBR, AUH, etc.)
• Crypto currency /cryptocurrency  (NLD, BRA, AUS, RUS, EU, etc.) 
• Digital asset (FRA, THA, GIB, BMU, etc.)
• Digital currency (SWE, etc.)
• Digital financial asset (GBR, etc.)
• DLT asset (MLT, etc.) 
• Virtual asset (HK, MLT, etc.) 
• Virtual currency (CHE, USA, CAN, JPN, CHN, IND, ISR, TUR, SGP, EST, KOR, etc.)

Let’s explain first what we mean by virtual currencies. This article uses mostly the term ‘virtual’, following OECD’s choice in its CTPA report ‘Taxing Virtual Currencies. An Overview of Tax Treatments and Emerging Tax Policy Issues’ (October 2020). Their research has found the expression ‘virtual currency’ in almost 50% of official publications and statements adopted worldwide, including the FATF glossary of terms.

To avoid further linguistic puzzles, let us agree on the definitions.

• The concept of virtual currency is not homogenous. It is an umbrella term for a currency that relies on the internet. It encompasses both centralized payment systems such as e-money, and decentralized systems that rely on cryptography. It therefore includes the most widely-known forms of crypto-assets: Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Ripple (XRP) plus an infinite number of other ‘coins’, also the more recently developed tokens backed with real assets (eg., securities, fiat currencies, stablecoins), and the projected  ‘central bank digital currency’ (CBDC) to be backed soon by some public authorities. To put it more simply, virtual currencies define any means of exchange used as an alternative to fiat money. It is digital and relies on encrypted. In the rest of this article, however, we are going to focus specifically on crypto currencies, which represent a subset (albeit the most important one) of virtual currencies.

• The word ‘asset’ used in our context with ‘virtual’ is generic and can be specified not only as ‘currency’, but also ‘coin’ and ‘token’.  The definition by FATF: “A virtual asset is a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities, and other financial assets that are already covered elsewhere in the FATF Recommendations”. 

• A transaction is any sale, purchase, exchange of virtual assets. Virtual currencies that exist only electronically are still not widely accepted, but the situation is changing. If the owner needs to use virtual currency, there are e-wallets, e-accounts, and some special debit cards. All transactions occur in dedicated electronic networks through dedicated applications and software.  

• Taxation of virtual currency transactions is a set of taxes in a particular jurisdiction that are levied on legal entities and individuals conducting certain transactions with virtual currencies. Not every event, though, is considered taxable.

Virtual Currency Taxation Trends 

While Bitcoin was launched in 2009, the first official statements on virtual assets were published at the level of national authorities in 2011 (France). In 2014 the first crypto tax guidelines were designed by the USA, Sweden, the UK.  Many jurisdictions have already come up with the relevant laws and regulations since then.

Last year the Cambridge Centre for Alternative Finance published an in-depth analysis of virtual asset regulations in 23 jurisdictions. There was also a comprehensive PwC’s ‘Global Crypto Tax Report’ report of October 2020.  The main takeaways from them and the above-mentioned overview of tax treatments compiled by OESD are as follows.

• Terms used in regulatory documents of different countries are confusing.

• There is little agreement on such specific aspects as the need for licensing.

• There is significant tax uncertainty. Guidance on the crypto taxes differs by country, by types of taxes, by detail. According to PwC’s report, most jurisdictions have basic guidance – VAT guidance on the exchange of virtual assets, taxing gains on disposal of digital assets, taxing returns of mining. Some countries (e.g., Hong Kong, Switzerland, Singapore) have guidance on taxing insurance of utility tokens (ICOs), taxation of security token insurance. More detailed guidance (being designed in OECD and Korea) features reporting frameworks for digital assets. Almost no guidance is available on virtual currency borrowing/lending, crypto funds, taxation of staking income, taxation of decentralized autonomous organizations (DAOs),  decentralized exchanges and other DeFi applications, non-fungible tokens/tokenized assets.   For tax policy, virtual currencies pose several challenges due to their nature and the rapid development of the industry.

• Countries qualify differently the legal nature and status of virtual currency. Many still have not decided how to treat virtual assets. Some are even hostile and treat virtual currencies as illegal. 

• Very few jurisdictions treat virtual currency and assets as legal tender (money or currency) for tax purposes. Others simply choose to ignore them on the basis that they don’t have any intrinsic value and do not physically exist.

• Virtual assets are mostly treated as property (often subject to tax on gains). 

• Virtual currencies hypothetically can be centralized if the issuer of the currency acts as its administrator and repository. Several central banks are discussing at their national levels plans to issue their digital currencies – CBDCs. 

• Most virtual currencies are blockchain based, therefore decentralized and exist in P2P networks, where there are no intermediaries or administrators. 

• The gains and losses arising from virtual currency transactions are calculated in different countries differently, tax bases and the hold periods are also different. This explains why the gains are taxed at different rates and can even be subject to tax exemption in different jurisdictions. 

• Many nationals in different parts of the world doubt that their governments or legislation will come to help if they face difficulties in virtual currency exchanges or Initial Coin Offerings (ICOs).

• Miners and traders confess that they feel vulnerable because their income is not protected. Mining starts with the initial investment into specific equipment, configuration of highly specialized hardware, and requires regular maintenance and procurement expenses.  Miners are often not legally insured or protected legally against such risks as disruptions in supplies and ultimate losses. They are worried because of the significant tax uncertainty, while the penalties for non-compliance are serious. 

• Big market players intended to use virtual currencies hope that regulators will soon come up with incentives and policies to support the development of cryptoeconomics. They also hope that taxation will be more principles-based, rather than merely prescriptive.

• Some countries have become hubs for crypto because the business environment is more crypto-friendly. 

• The 4 types of crypto currency transactions: 
• the creation of a new token via mining or airdrops
• exchanges between virtual currencies and fiat currencies 
• exchanges between different token types 
• exchanges in payment for goods, services, or wages. 

• Virtual currency (VC) taxes around the world are widely applied to two categories:

• individuals who trade or own virtual currencies;
• legal entities – virtual currency companies and exchanges.

VC tax implications for individuals

Income received in virtual currency by individuals (natural persons) is taxed on the same legal grounds as income received in fiat currency on any other property.

Virtual currency can be:

• transferred
• stored
• traded electronically

Income can be generated by individuals through the following virtual currency transactions:

• when purchasing virtual currency at lower prices and selling at higher prices
• mining 
• renting out premises and storage capacity
• receiving a salary in virtual currency.

Virtual currency trading is similar to trading in securities, shares, other financial instruments. Therefore, the same approach can be adopted to defining whether a trade is being conducted (or not). Likewise, the existing Securities Tradings legal regulations can be used as a general framework for virtual currency trading.

Investors do not pay taxes for buying and storing virtual currency. This means that you will be subject to crypto taxation only when you sell or trade virtual currency. Failure to report income generated from such a transaction could result in penalties.

Capital gains tax (CGT) on virtual currencies is the same as for other assets. In case of a loss in transactions, you can claim the loss and save on tax deductions. In many countries, CGT is charged at a flat rate. This tax can be of two types: long-term and short-term.

• The long-term CGT is payable in case you kept the currency for over a year before selling or trading it. 
• The short-term CGT applies to virtual currencies you’ve kept for less than a year. 

That is why individuals need to keep records of every transaction. The CGT rates vary by country and by taxpayer category.

VC tax implications for legal entities

A firm, a corporation, a company, or any other legal entity is generally subject to taxation when it generates revenues from virtual currency transactions. The tax does not depend on the holding period (when the company keeps the virtual currency), and there is no tax exemption related to the holding period.

Mining qualifies as self-employment, so virtual currency miners have to pay taxes on their revenues. They pay the self-employment income tax and can deduct expenses, such as electricity and storage costs. 

Bitcoin transactions conducted by a legal entity are treated as commercial activities. 

Individual entrepreneurs and partnerships pay income tax.

Public and private companies pay corporation tax.

Income derived from the ICO is taxable, but capital might not be – depending on the jurisdiction. Rates depend on the taxpayer’s status of token buyers or startups that issue tokens. As for the VAT, the terms are country-specific. 

Depending on the country and circumstances, some entities may be exempt from taxes. 

Taxation of Virtual Currency Transactions in Different Countries

In most countries, the exchange of virtual currencies is not subject to VAT. However, the supply of taxable goods and services paid with virtual currencies is subject to VAT. 

For tax purposes, almost all countries consider virtual assets to be a form of intangible property.  

Taxation of Virtual Currency Transactions in Different Countries

Jurisdiction	Types of virtual assets	Taxes
Commonwealth of Australia	Property	Progressive income tax (PIT) Goods and services tax (GST)
Federative Republic of Brazil	Commodity	Capital gains tax
Canada	Commodity	Progressive income tax (PIT)
People’s Republic of China	Virtual commodity	Progressive income tax (PIT) (for international trading)
French Republic	Property	Capital gains tax
Federal Republic of Germany	Private money	Progressive income tax (PIT)
Israel	Digital asset	Progressive income tax (PIT) Value-added tax (VAT)
Japan	Property	Progressive income tax (PIT) Consumption tax
The Netherlands	Asset	Income tax
Russian Federation	Digital asset	Income tax
Republic of South Africa	Intangible asset	Progressive income tax (PIT)
Republic of Korea	Property	Income taxValue-added tax (VAT)
Kingdom of Sweden	Digital asset	Progressive income tax (PIT)
Swiss Confederation	Property	Progressive wealth tax Progressive income tax (PIT)
Republic of Turkey	Commodity	Progressive income tax
United Kingdom of Great Britain and Northern Ireland	Private money or assets	Corporation taxProgressive income tax (PIT)
United States of America	Property	Capital gains tax Progressive income tax (PIT)

There is a list of jurisdictions that do not levy a separate tax on virtual currency transactions (as of January 2021): 

• Singapore
• Portugal
• Malta
• Malaysia
• Belarus
• Ukraine.

Virtual assets are likely to be subject to property taxation in countries that levy inheritance, gift, wealth, or transfer taxes.

Let us study some practical cases in more detail.

Practical cases 

BELARUS

In Belarus, natural and legal entities are allowed to mine and trade in virtual currencies, participate in international exchanges. Local banks are encouraged by the regulator to raise funds by getting involved in issuing tokens for trading and other transactions. In November 2020, the state-owned Belarusbank launched its Crypto Exchange on the White Bird platform. It provides cryptocurrency trading services with Visa payment cards. The country has opened a special economic zone, the Belarusian High Technologies Park (HTP), with a special tax and legal regime. Virtual currency transactions in Belarus are qualified as conventional activities of commercial enterprises. Until January 2023, mining will not be subject to any taxation if it is performed by any individual using his/her private capital and for their specific personal purposes. Otherwise, they need to register as private entrepreneurs and pay the income tax as any other proprietor. Belarus is currently very appealing for virtual currency investors.

CANADA

The Canadian ‘regulate-and-embrace’ policy is focused on AML aims. Virtual currency is treated not as a currency but as an asset or commodity. The Canadian tax agency qualifies the use of virtual currency as a barter transaction when it is used to buy goods or services, and taxes revenues accordingly. Any profits from the sale or exchange of virtual currency are taxable at rates ranging from 15% to 33%. Half of all the acquired revenues can be deductible from the taxes. Traders maintain accurate records of crypto-trading activities for capital gains tax purposes. Virtual currency transactions are subject to laws and regulations for securities. Such laws are stipulated on the level of each province and territory, not the federal level. Though they are largely harmonized, taxation of virtual currency remains confusing. The central bank is in the progress of launching its CBDC, the digital loonie.

CHINA

The People’s Bank of China issued a statement warning citizens to avoid possible ICO risks and to follow strict procedures regarding virtual currency transactions, explicitly prohibiting their exchange and ICOs inside the country. It declared virtual currency illegal in 2017 and ousted ICOs and exchanges based on fraudulent activities. Any non-compliance with the prohibition can result in criminal charges. However, income received by individuals through virtual assets purchase and sale on international platforms is taxable. According to reports, China is starting a pilot project for a state-sponsored national digital currency. 

EUROPEAN UNION

Virtual currencies are generally viewed as assets, not as currencies. There is no single tax regulator in the EU. Back in 2015, the Court of Justice of the European Union (CJEU) ruled that Bitcoin transactions are exempt from consumption tax under the section on activities involving currencies and coins of legal tender. Transactions qualify for other tax categories, i.e., capital gains or income tax. Mining is considered a business activity and is taxable. Individuals profiting from investments made in virtual currency are subject to capital gains tax. Every EU member state is free to design its specific taxation policy for virtual currency transactions. Besides, the taxes depend on the type of the transaction, the price, the level of AML. 

FRANCE

The term used for virtual assets: digital asset. The French regulators do not recognize digital assets as a means of payment and do not classify them as legal tender. The definition does not include any particular virtual currencies, especially anonymous ones. Virtual currency is treated as property.

France adopted ‘the Action Plan for Business Growth and Transformation’ (PACTE law) in 2020. The document outlines new rules and regulations for virtual currency service providers and ‘ICOs’. It says that the main aim is to better harmonize the French AML approaches with FATF principles and to respond to new risks presented by the use of digital assets in France. It is also meant to calm relations between the crypto and more traditional industries.

The Council of State redefined how to file crypto taxes in France. Taxes are applied when cryptocurrencies are exchanged for ‘traditional’ currencies only: at the income tax rate of 12,8%. Crypto-to-crypto transactions remain tax-exempt. VAT is payable in case a  virtual currency is used to buy a good or service. Capital gains realized are taxed at a flat rate of 30%, including social security contributions. There are two exceptions, though. The entire mechanism of tax calculation is very sophisticated. Many taxation uncertainties are in such areas as the processing of credit card transactions with virtual assets, the staking or savings income, leveraged operations, digital asset lending, etc. Mining is currently taxed as non-commercial income but this stipulation may be revised soon. A license is not required when a trading platform sells its own digital asset. Such activities that can be qualified as a payment service provider, a virtual asset exchange, a custodial wallet provider, an electronic money issuer need to be licensed.

GERMANY

The German Federal Ministry of Finance (BMF) does not consider bitcoin to be a means of payment and classifies it as private money, treating it as foreign currency or intangible property. No value-added tax is levied when exchanging or trading virtual currency. Bitcoin is also not considered as an investment. Trading in virtual money is considered a private sale. If the virtual assets are sold after a holding period of at least one year, the profits from the trade are not taxable. Also, trades are tax-free when the capital gains for trading are less than EUR 600 annually. There is no license needed to create and use virtual currencies, including mining. However, there are licensing requirements for trading platforms and exchanges. 

HONG KONG

In late August 2018, the Hong Kong Financial Services and Treasury Board (FSTB) released a report stating that virtual assets are not a threat, despite uncertainty in their regulation. Virtual currency is considered a virtual commodity. The taxation of virtual currency transactions excludes capital gains tax, but profits made are subject to income tax. 

Hong Kong was ranked #6 in the PwC Crypto Tax Index 2020. It is characterized as a jurisdiction ‘which is relatively friendly to blockchain and fintech businesses from a tax perspective’. A new digital assets tax guidance was recently published by the Hong Kong IRD.

INDIA

The framework for the taxation of crypto transactions has not been clearly shaped yet. But virtual currencies are currently not banned, and paying taxes is inevitable for investors who hold virtual currency. Crypto-assets are classified as digital products on a par with various software products. At the moment the Indian authorities have established taxation of transactions with virtual currency at the rate of 18%. Under the new legislation, there will be adopted a new classification of virtual currency activities. Transactions outside the country are subject to a flat fee on goods and services and are also treated as export-import transactions in goods. 

JAPAN

Virtual currency is defined as a means of payment with intellectual value (a specific class of asset). In 2020, crypto legislation came into effect. Crypto exchanges need to be licensed. Income from virtual currencies is taxable. Virtual currency is treated as commodities, so transactions are subject to corporate, capital gains, and income taxes. Depending on the gross income, the income tax rate can range from 5% to 45%. Additionally, a 10% tax on residents is added. Japan is generally friendly to digital assets. Japan is currently developing a tracking system that will supply information from transaction intermediaries to the National Tax Agency. 

KAZAKHSTAN

The Kazakhstan authorities have decided to make mining their national prerogative. Last fall, they announced the plan to attract investments worth 300 billion tenges (USD 714 million) into the cryptocurrency sector over the next three years. The goals of this program are to create new jobs and boost sales of electricity. Kazakhstan adopted cryptocurrency tax regulations in 2019 to support cryptocurrency-related activities. Incomes generated through crypto mining are tax-exempt if the virtual currency is not converted to fiat money. Besides, Kazakhstan’s central bank is going to issue digital currency. However, Kazakhstan allows only the mining of asset-backed cryptocurrencies while prohibiting the mining of unsecured cryptos such as Bitcoin. 

RUSSIA

On January 1, 2021, the RF Law ‘On Digital Financial Assets (DFAs)’ came into force, which defines digital currency and bans its use as a means of payment by entities registered in Russia. The new law qualifies virtual assets as property.  As for the specific taxation of virtual currency transactions, such provisions have not yet been introduced in Russia. However, the new law obliges citizens to file in their tax returns the amount of the digital assets received in their cryptocurrency wallets if the transactions for 12 months exceeded the amount of 600,000 rubles (roughly EUR 6,500 or USD 7,900). The Central Bank is discussing the plan of launching a CBDC ruble by the end of 2021.

SWEDEN

Virtual currencies are not considered currencies but are treated as assets in Sweden. However, the country has already started piloting a national e-currency (the first CBDC initiative in the world). Three scenarios determine how virtual currency transactions are taxed in Sweden. If you bought or sold virtual currency, the amount you spend is the amount you paid for the bitcoin converted into Swedish krona. You are taxed on all profits at a rate of 30%. If you incurred a loss, it is deductible at 70%. If you received bitcoin as a payment on a lump sum basis, the taxable base is the amount you report as turnover, including VAT. If you received bitcoins as wages for employment, the taxable base is the amount you report as service income. Depending on the income, there are four levels of TIT with rates ranging from 32% to 57%.

SWITZERLAND

Crypto-assets are treated like a ‘foreign currency’. Ownership of them is subject to a property tax and must be reported on the securities statement. The rates are not fixed. The cantonal tax authorities calculate the average price of ‘digital coins’ at the end of the year, each region has its specific taxes on crypto holdings. When a person uses virtual currency in a professional environment, the gain is taxable and the loss can be subject to a tax deduction. Switzerland qualifies virtual currency mining as self-employment. If an individual receives payment in virtual currency for the provision of services, the income received is subject to personal income tax. Professional trading in virtual currency is subject to business tax. Swiss financial regulator requires a license for bitcoin kiosk operators. Though the tax regulations are rather complicated, Switzerland has succeeded in attracting many blockchain businesses to its so-called ‘Crypto Valley’ and this is one of the most beneficial jurisdictions for businesses operating with virtual currencies.

UK

In the UK virtual currency is treated as intangible property and a means of payment for goods and services. It uses a case-by-case approach to determine if a virtual asset falls under existing regulations. Generally, if a company uses virtual currency as an investment or payment method, it must be treated as currency. This means that the end-of-the-year balances must be converted into pounds sterling on the tax return. To use virtual currencies for anything other than payments is a risk. Taxation of gains on virtual currency transactions is similar to taxation of financial assets – after the sale. The taxable minimum is GBP 12,500. For larger amounts, tax rates vary from  20 to 45%. In the  UK VAT tax does not apply to digital currencies. The FCA recently issued guidelines aimed at the revision of the taxonomy of virtual assets.

UKRAINE

Ukraine has not finalized yet its tax regulations for virtual currency transactions. People’s deputies have submitted to the Parliament for consideration a bill on the taxation of virtual currency transactions at the rate of 0 to 5 % plus the military fee at a rate of 1.5 %. They propose to gradually increase in the future the virtual currency tax rate to the level of the personal income tax of 18%. In 2020, Ukraine’s revenue agency has published guidance for taxpayers to report digital assets as intangible property.

USA

The USA tax system is known worldwide as one of the strongest and most complicated, and its approach to virtual currencies is no exception. Virtual currency is treated as property, real estate, but not as currency. Therefore any crypto-to-crypto transaction is potentially taxable. 

The virtual currency transactions taxation rules involve the property tax plus notifications of the Internal Revenue Service (IRS) of their transactions. The Internal Revenue Service treats virtual assets as taxable property, not as legal tender. Profits are derived from capital gains and not exchange rate differences. If you buy virtual assets with fiat money, such a transaction is not taxable because naturally there is no gain. The taxation of miners in the United States is based on annual gross income. Taxpayers who receive virtual currency for goods and services report the value of the crypto-asset received on their tax return based on the exchange rate on the date of payment. Federal income tax ranges from 15% to 37%, depending on net income. Long-term capital gains are taxed at 0-20%. A sales tax of 0 to 8% can apply when something is bought by virtual currency, depending on the state, but there are nuances. 

Conclusion

Countries treat virtual currency differently:

• as personal or corporate income subject to income tax;
• as assets held or traded, similar to stocks, bonds, real estate, and other personal property types that are subject to capital gains tax, can sell at a higher price than they were purchased, can depreciate or appreciate, and in some countries can be tax exempted;
• a combination of taxes or even no special taxes on virtual assets at all. 

Please remember that we can help you get a virtual currency license and open a bank account abroad for your crypto-activities. You can contact us at our e-address given at the top of this page.