A Guide to Legislation and Taxation on Cryptocurrencies

Beginner’s Guide / 09.03.2020

Cryptocurrency Legislation

Over the past 4-5 years, the legislation of cryptocurrencies, blockchain and similar instruments have become one of the most important tasks for regulatory authorities around the world. Even though regulation is of utmost importance, the sudden spark has its reasons. Scrupulous practices such as ICO scams, exchange hacks, unregulated creation of monetary schemes, etc. have made it necessary. Governments worldwide are acknowledging the importance of regulatory oversight for keeping a check on the space.

This has received a lot of backlash from certain personnel within the sector. A lot of enthusiasts argue regulation and oversight diminishes the reason for the existence of cryptocurrencies and Blockchain.

Governments are majorly concerned with the cryptocurrency aspects of Blockchain technology. A Cryptocurrency directly challenges the monetary authority within their country. Introducing a new form of monetary value for daily use starts a competition between a cryptocurrency and a sovereign currency. This is most usually perceived by Governments as an act of hostility rather than an economic innovation.

Perception of Cryptocurrencies among Jurisdictions:

Certain jurisdiction has already taken up the task of forming regulations and taxation policies concerning cryptocurrencies. The perception of cryptocurrencies differs from jurisdiction to jurisdiction, depending upon their degree of hostility. Many countries have outright dismissed their use as it challenges their sovereign power. Some countries acknowledge bitcoin and other cryptocurrencies as monetary value while others chose to classify them as property or assets or commodities.

Some of the major jurisdiction and their response to cryptocurrencies are:

United States of America

The USA’s legislation dates back to 2014 when a taxation guideline was circulated, explaining the procedure of taxing gains from cryptocurrencies. This guideline assumes by default that bitcoin and similar instruments are nothing but investment mechanisms. Meaning they should be taxed like any other asset or property. Its consideration as a legal tender was dismissed, but due to the Federal nature of the country, that varies from state to state. Recently, the USA also came up with The Virtual Currency Tax Fairness Act of 2020. According to the bill, anyone with gains under $200 in a tax year won’t have to report anything cryptocurrency related to their tax returns.

China

China has publicly condemned the use of cryptocurrencies and refuses to acknowledge its innovation capabilities reasoning the monetary nature of bitcoin. ICOs are banned as they are seen as an unregulated mechanism for raising funds and banks are not allowed to handle anything relating to bitcoin or other cryptocurrencies. The country also doesn’t recognize bitcoin as legal tender and have continually been harsh towards cryptocurrency growth. In 2019, the president of China ignored cryptocurrencies but acknowledged the importance and influence of Blockchain. China is currently on the fast track to being a Blockchain hub of the world.

India

The regulations concerning cryptocurrencies are quite foggy in India. The government has effectively banned any financial institution to hold, accept, or be involved with any business or entity dealing in bitcoin and other cryptocurrencies. There are but a few guidelines concerning its taxation. India has repeatedly delayed commenting on the regulation of cryptocurrencies and even refuses to consider bitcoin as a legal tender. Speculations are considered to be taxed under capital gains as bitcoin is considered to be a commodity under the Income Tax Authorities.

 Singapore

Although cryptocurrencies are not considered a legal tender, Singapore’s tax authority treats Bitcoins as ‘goods’ and so applies Goods and Services Tax. Cryptocurrency exchanges are allowed to function freely without any regulation, enabling an influx of innovation. Singapore is continually striving to stimulate innovations in the Blockchain sector to ensure its ability to be ahead of the times. In 2018, almost a dozen blockchain-based startups opened up shop in Singapore, citing its friendly approach.

Switzerland

Switzerland has taken an open-arms approach when compared to other jurisdictions. They openly accept cryptocurrencies and their innovation capabilities. Certain cities, such as Zug, which markets itself as the Silicon Valley of Blockchain, has gone as far as accepting Bitcoin for tax payments. This frees up the hindrances in opening a Blockchain-based startup. Bitcoin is openly accepted as a legal tender, and the acceptance rate has been steadily increasing.

Taxation Procedures

There are roughly three ways jurisdictions worldwide have taxed bitcoin and related cryptocurrencies

As an Asset/Property

In jurisdictions such as the USA, India, South Korea, etc., bitcoin is generally viewed as property. Speculative gains on bitcoin are taxed under Capital Gains laws. There are three events under which Capital Gains apply. Buying/selling of cryptocurrencies, exchanging one for another and spending cryptocurrencies to buy goods or services. In all these events, it is expected from users to take note of the price at which the cryptocurrency was bought, the price at which it was sold, the price at which it was exchanged and the price at which it was spent. This effectively ensures that the sovereign currency is used for reporting and taxation purposes.

As a Commodity

Due to its uncanny resemblance to Gold, bitcoin is sometimes considered a commodity. A commodity has a limited, typically fixed, supply, because unlike a stock certificate, you can’t just type up another ton. Also, the pricing is set almost entirely by supply and demand. Indonesia and other jurisdictions view Bitcoin in this way, meaning that bitcoins can be bought just like any other commodity such as cars, food, gold, etc. No taxation is required on speculation, but a Value added tax or its equivalent is applicable on the purchase of cryptocurrencies.

As a Currency

Unlike common fiat currency, Bitcoin, however, does not have a centralized governing authority, and to everyone’s pleasure, it is also not tied to any country or geography as fiat money usually is. Governments are generally not comfortable with the idea of bitcoin as a currency, as it prospectively dissolves the sovereign’s right to a monetary monopoly.

Switzerland, Malta, Estonia are some of the places where Bitcoin is considered as a legal tender, while France joined them recently. Effectively, bitcoin can be used just like any other currency, to buy and sell goods and services, functioning as a substitute for the sovereign currency. In such cases, taxes are not levied on bitcoin but can be paid in bitcoin.

Advantages of Legislation

In most cases, regulation acts as a safety net for the public. Bitcoin and blockchain are merely a decade old, and most people who try to get into the ride have a bare minimum or nil understanding of the technology. Regulations will provide a barrier to scrupulous practices and protect the interest of the consumer. Well planned regulation will ultimately differentiate cryptocurrencies into different architectures based on the function they serve. They can then tokenize traditional assets in a way that reflects and enforces existing real-world regulation. Blockchain will be able to reach its full potential in places where regulatory oversight and innovation thirst go hand in hand.

The problem faced by all the governments around the world is that it is virtually impossible to control the use, propagation, and adoption of cryptocurrencies. All they can try is slowing down the propagation by asking intermediaries to disassociate themselves with anyone found to do so. Isolating the users so that the “virus” doesn’t spread.

It is in the best interest of regulators to try and form a regulative guideline for using and innovating in cryptocurrencies and blockchain. Jurisdictions that have at least managed to form a basic framework are reported to hugely benefit from the inflow of innovation. Blockchain start-ups can pop up in places where legislations are hugely favorable. Malta, Estonia, Switzerland have all seen immense traction in this case.

Featured image courtesy of Shutterstock.

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Sudarshan M is a long time crypto-enthusiast. Pulled in by bitcoin early on, it did not take long for Sudarshan to divert all of his academic attention from business studies to blockchain by doing his Masters and eventually pursuing his PhD in the subject.