Current state of Crypto Taxation

Current state of Crypto Taxation

In Germany, the ministry of finance decided against charging a tax on cryptocurrency when they are used to purchase goods and services, but rather when individuals exceed an imposed profit margin. Estonia charges both VAT and a capital gain tax, because it considers digital currencies as an investment tool. France, however, has reduced the tax rate associated with retail crypto traders. On the other hand, some EU countries have chosen a crypto friendly approach. For example, in the Netherlands, using digital currencies is classed as an exchange of goods and therefore not subjected to tax.

Digital Currency taxes in the EU

The European Union consists of 28 member states, however, there is still no harmonized tax policy or regulatory guideline. Consequently, these countries are mostly similar when it comes to their legislation and public polices, therefore, major differences cannot be expected for the small enterprises. There is a decision issued by the European court of Justice that governs all EU countries stating that digital assets represent a form of currency. Owing to this, all transactions are exempt from the VAT, though, there is still no unitary policy on whether other forms of taxation such as capital gains tax should be applied to crypto-based profits. 

Crypto tax

Digital Currency taxes in the US

In 2014, the US Internal revenue service (IRS) released a set of guidelines aimed at digital currencies investors and their operations, notifying them that “the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.”

It is important to note that IRS has decided to treat digital currencies as property, making all transactions taxable, regardless of whether goods and services are purchased. Those who do not report their bitcoin taxes to the IRS are fined of $250,000 and probably even serve a jail time, just to highlight the gravity of defaulting the rules. As there is no effective framework for reporting, there has been reports that about 45% of crypto owners did not declare their crypto profits in the US.

The best practices of filling tax returns 

  1. Reporting income from foreign source: the tax authorities and governments of many countries are coming together to ensure that cryptocurrency does not become an avenue for money laundering and tax evasion. Thereby forcing crypto exchanges to report the transaction details to the tax regulatory body.
  2. Income from mining operations: if you are in the business of mining, you are in the business of making money. As such, all transactions relating to your business should be reported as regards taxing as any other business venture operating with fiat currencies would. However, you get to deduct utility cost such as electricity costs, rent before arriving at the amount to be reported to the tax authorities. 
  3. Choosing the right tax method to use: Cointracking is a tax software that provides various methods that can be used for filling cryptocurrency tax. But some of these methods are yet to be accepted is various countries. Therefore, there is a need to first check which method to use in your location and consistently use the method.
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