Blockchain-based cryptocurrency has been dominating the headlines for some time, but it’s not only because of skyrocketing prices and overnight millionaires. It’s also because of a complete lack of regulation.
When Bitcoin first hit the market in 2009, Governments were slow to act. Many, it’s easy to assume, didn’t think it would catch on and it’s fair to say in the beginning it didn’t. However, since 2017, cryptocurrency has become almost mainstream. There are over 1,000 cryptocurrency coins and altcoins circulating, and many of these have market caps into the millions. Governments are now taking notice.
However, much of the appeal of cryptocurrency is that it’s decentralized. It has become a hot zone for not only those looking to invest but for money launderers, scammers, hackers and general criminals. While cryptocurrency laws have been slow to be enacted, they are now slowly trickling through.
As a result, the way in which you used to use cryptocurrency may not be the legal way anymore. Therefore, there’s no time like the present to read up on your tax and legal obligations the next time you go to buy, sell, or trade in cryptocurrency.
What does your country’s tax laws for cryptocurrency look like?
Canada and the US
While cryptocurrency is considered a digital currency – e.g., money, it’s not taxed as such in Canada and the United States. Instead, it’s classed as property and taxed appropriately. Those who buy, sell, and trade cryptocurrency will be required to pay tax, known as Capital Gains Tax, on any profit they make.
If you were to buy Bitcoin for $5,000 but sold it again for $10,000, you would need to pay tax on the $5,000 profit you made. Even if you traded that Bitcoin for say, Ethereum, you would still need to pay tax on that as well. Cryptocurrency may be decentralized, but it is now no longer above the law.
However, because it’s classed as property or a commodity, there are also some benefits for it to be taxed in this way. If you keep your investment nestled away for over 12 months, you benefit from paying less tax because it’s classed as a long-term capital gain. Then, if you purchased Bitcoin for $20,000 but sold it for only $10,000, you technically lost money and could, therefore, use it as a tax write-off.
Europe and the UK
The laws surrounding cryptocurrency in Europe and the United Kingdom are not as clear-cut, and you may need to get in touch with a cryptocurrency-savvy accountant to help you work out the finer details – especially if you’re an avid investor. In the beginning, cryptocurrency was bound by Valued Added Tax, meaning it was taxed as a general product. However, in 2014 the HM Revenue and Customs department repealed this decision, aiming to treat it more like a currency than an asset, item, or property.
This is because Value Added Tax focuses on paying tax on the original purchase price of a product, opposed to the value of it when it is sold, or the profit made from it. Therefore, there is now a complex set of rules in place for the sale, transfer, or purchasing of Bitcoin and similar coins – with Value Added Tax only relevant if you intend on purchasing goods with cryptocurrency rather than the purchase of the currency itself.
If you are planning on investing in cryptocurrency, it’s crucial to be aware of your tax obligations. Ignorance is not an acceptable excuse for not paying tax, so get in touch with an accountant who specializes in cryptocurrency tax to find out what you owe.