Cryptocurrency holders have long struggled with their tax obligations. These fiduciary duties have been made difficult by tax authorities several steps behind the technology and now playing crypto catch-up. Updated guidelines from the U.S. and UK tax authorities were finally released this year, but the initial relief conscientious bitcoiners felt should prove short-lived as, upon closer inspection, the documentation left many crypto questions unanswered.
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It’s 2019 and the taxes are still a burden
The lack of consistency in taxing crypto revenues, with some national governments happy to give up the can and others determined to collect their pounds of meat right away, is frustrating to say the least. the latest guidelines by Her Majesty’s Revenue and Customs (HMRC) for UK residents has succeeded in clouding the already damp water.
Again, a tax authority’s attempt to clarify crypto taxation has instead become a source of uncertain questions. It was the same when the IRS published crypto tax guidelines in 2014 and again in October of this year. Why are such powerful state organs unable to lay down clearly defined tax principles for virtual currencies? Is it because those in power don’t fully understand this rapidly evolving environment or the technology behind it? Or is the nature of forks, airdrops and token sales inconsistent with tough tax rules?
Robin Singh is the founder of the crypto tax platform Koinly. “Part of the problem,” he explains, “is that regulators don’t understand cryptocurrencies. In the latest IRS guidelines, for example, the IRS refers to forked coins as “airdrops after a fork”. Little do they know that there is no real airdrop – the ledger is simply copied. This misinterpretation has led to the problem investors now face: paying income tax on split coins that they may not want to use. “
Exchange tokens ‘are not currency’
HMRC’s current To update to his guidance Crypto taxes, published November 1, dealt with crypto transactions carried out by corporations, corporations such as partnerships and sole proprietorships, as well as individuals. Essentially, she wanted to clear the confusion about how cryptocurrency transactions incur capital gains tax, social security contributions, corporate tax, sales tax, and income tax.
The crux of HMRC’s reasoning is that “exchange tokens” are generally not currencies, stocks, or marketable securities – that is, they are stamp tax exempt. Nonetheless, stamp taxes are incurred on tokens used in debt transactions.
Bitcoin is explicitly mentioned in the Policy Paper as an example of an Exchange token, with security and utility tokens to be addressed in a future update. Although the strategy paper is entitled “Tax on Crypto Assets”, it is therefore anything but comprehensive. And, to quote an instructive line: “Tax policy can evolve with the development of the sector.”
Crypto Tax Obligations for Individuals
As before, HMRC emphasized that “the tax treatment of all types of tokens depends on the type and use of the token and not on the definition of the token”. In other words, it is up to you whether or not you incur taxes at all.
If you sell swap tokens that have been upgraded in value, they are subject to capital gains tax as an investment; Income tax and social security contributions are also payable on crypto assets received from employers as cashless payment and from mining operations or airdrops.
In cases where individuals are essentially acting like businesses, often doing financial transactions in crypto assets, their taxable trading profits are subject to income tax rather than capital gains tax. Of course, you can reduce your tax liability by offsetting losses against future profits; the cost of the asset itself can be a deduction.
A thankless task for tax authorities
Since assets like Bitcoin are traded on non-sterling exchanges, the HMRC guidelines state that the value of any gain or loss on an individual’s self-assessment must be converted to sterling. The guidelines indicate that individuals must keep separate records of each transaction of crypto-assets, including the type of asset; Date of transaction; if they have been bought or sold; Quantity and transaction value in pounds sterling; cumulative total of investment units held; and bank statements and wallet addresses.
Of course, it’s easy to drill holes in the guide. The tax authority says that reasonable care should be taken to provide “reasonable assessments” for transactions using a consistent methodology. However, it does not go into what would be appropriate and what method would be permissible. The HMRC also betrays its own ignorance when discussing fraud cases in the cryptosphere, noting that theft is not considered disposal “since the person still owns the assets and has a right to recovery”. You may have one Right to reclaim them, but they probably have no prospect of it. Victims of theft also cannot claim a loss of capital gains tax.
Crypto tax obligations for companies
The HMRC guidelines for companies are expected to be even more complex and confusing than for individuals. Crypto mining companies are subject to taxation based on factors such as the level and frequency of activity, level of organization, risk and commercialization. But most business activities in the cryptosphere are subject to some form of tax, be it buying and selling tokens, exchanging tokens for other assets (including other forms of cryptocurrency), or supplying goods and services for tokens, the latter of which includes VAT on the “pound sterling value of the exchange tokens at the time of the transaction”.
Confusion comes from qualifiers such as “the nature of the tax depends on who is involved in the business,” although the process by which the financial statements should be prepared is at least clear: they should follow generally accepted accounting practices (GAAP) or if applicable, International Accounting Standards (IAS).
If the activity of a company is a trade, income and expenses are included in the calculation of the resulting profit. When a partnership does business, the partners are taxed on their share of the trading profits. And if the activity related to the exchange token is not considered a “trading activity”, the profit from the eventual sale of a crypto-asset will be charged to corporate income tax.
What do we do now?
The fact that the status of security and utility tokens remains unsolved suggests that the HMRC continues to grapple with fundamental issues related to the taxation of crypto. While these latest directives answer some long-held questions about “exchanging tokens”, they also raise others. Is the HMRC open to changing its stance at some point that cryptocurrency is not money, for example? This is asked ad infinitum, especially when acceptance by retailers increases. For bitcoiners in the UK, US and other leading crypto countries, guessing the intentions of the tax authorities has become a dark art.
Do you think the tax authorities are to blame for making crypto tax policies more difficult, or are they just struggling to keep up with a rapidly evolving industry? Let us know in the comment section below.
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