New Crypto Tax Laws
How major economies are catching up with cryptocurrencies
The way crypto assets are taxed is changing worldwide. Since their inception, crypto currencies have aimed to exist outside of the financial mainstream, providing an alternative form of capital flow away from centralised structures. However this has obvious limitations; while they can be exchanged for goods and other crypto assets, they only have a few applications before the user needs to convert them into fiat currency for use elsewhere.
New legislation aims to normalise crypto assets as part of the mainstream financial system, reducing their usefulness to criminals and money-launderers and making them a much more stable and useful investment tool.
Part of the appeal of crypto assets has been their very lack of regulation. The potential for exponential returns on investments, along with the anonymity and their existence outside of traditional strictures has long been touted as a benefit.
North America
In the USA, the Inland Revenue Service has implemented rules that mean income tax must be paid in the year of their acquisition. In other words, this is before they are converted into fiat currency, so are classed as normal income before they become usable in the US dollar value. For example, crypto assets can be held for years as investments before they are converted into currency for use. This has generated a lot of debate in the country, as they are subject to normal income tax rather than being counted as assets. This has been likened to a baker taxed on the bread that he makes, not the bread that is sold.
Ryan Aussi and Hayley Hassan at FORVIS put the taxation problem succinctly -
“Imagine being a miner back during the American gold rush of the 1800s, and regulations have been set so that gold miners must recognize income upon the extraction of gold from the earth. In this hypothetical situation, income is taxable, irrespective of whether the gold is sold or exchanged. It is reasonable to imagine that such a ruling would garner significant opposition from miners, who could argue against its premature taxation on their profits, especially considering the volatility of gold prices which could prevent them from realizing the income.” i
North America is by the largest market for crypto deals and assets and is to some extent the pacesetter for how crypto assets are accounted for. However there are significant differences across the Atlantic.
North America
In the USA, the Inland Revenue Service has implemented rules that mean income tax must be paid in the year of their acquisition. In other words, this is before they are converted into fiat currency, so are classed as normal income before they become usable in the US dollar value. For example, crypto assets can be held for years as investments before they are converted into currency for use. This has generated a lot of debate in the country, as they are subject to normal income tax rather than being counted as assets. This has been likened to a baker taxed on the bread that he makes, not the bread that is sold.
Ryan Aussi and Hayley Hassan at FORVIS put the taxation problem succinctly -
“Imagine being a miner back during the American gold rush of the 1800s, and regulations have been set so that gold miners must recognize income upon the extraction of gold from the earth. In this hypothetical situation, income is taxable, irrespective of whether the gold is sold or exchanged. It is reasonable to imagine that such a ruling would garner significant opposition from miners, who could argue against its premature taxation on their profits, especially considering the volatility of gold prices which could prevent them from realizing the income.” i
North America is by the largest market for crypto deals and assets and is to some extent the pacesetter for how crypto assets are accounted for. However there are significant differences across the Atlantic.
Europe
As recently as 2022, Mazars in Paris paused all work on crypto clients, owing to a lack of transparency about reserves and increased public scrutiny on the sector.ii While it speaks volumes about the firm’s dedication to its principles, it provided a blow to the credibility of crypto companies. So what has changed since then?
In the European Union, the crypto industry now faces stricter requirements for low-value payments than the traditional financial sector. EU member states have also signed up for information-sharing policies known as “DAC8”, which make it possible to pursue crypto taxes regardless of territory.iii This is central to a broader governing strategy, seeking to combat money laundering and sanctions evasions within the EU’s borders. These measures introduce a consistency of legislation throughout the region, tightening loopholes and responding to criminal agility.
Legislation appears to be stricter than in other areas, however the new rules once enacted will bring the industry in line with other regulated industries, such as gambling and electronic banking. This provides far more robust controls on cryptocurrencies’ potential for use in money laundering, while changes in taxation do not mean that crypto’s vaunted anonymity comes under threat, as GlobalData associate analyst Harry Swain notes:
“Importantly, the European Parliament has reassured stakeholders that the regulatory measures do not seek to outlaw privacy-enhancing crypto technologies. In May 2023, the EU Crypto Initiative called on lawmakers to reconsider planned restrictions on privacy tools, advocating for a clear distinction between prohibited anonymous high-risk accounts and high-risk anonymising instruments.” iv
What effect this has on start-ups and new businesses remains to be seen, but there is a drive to standardises what to this day has been seen as a “Wild West” industry, with little oversight or regulation. Implementation of such wide-reaching legislation will likely cause some level of difficulty. However, Europe remains the second largest market for crypto, and firms are clearly willing to comply if it provides access to the trading bloc.
Europe
As recently as 2022, Mazars in Paris paused all work on crypto clients, owing to a lack of transparency about reserves and increased public scrutiny on the sector.ii While it speaks volumes about the firm’s dedication to its principles, it provided a blow to the credibility of crypto companies. So what has changed since then?
In the European Union, the crypto industry now faces stricter requirements for low-value payments than the traditional financial sector. EU member states have also signed up for information-sharing policies known as “DAC8”, which make it possible to pursue crypto taxes regardless of territory.iii This is central to a broader governing strategy, seeking to combat money laundering and sanctions evasions within the EU’s borders. These measures introduce a consistency of legislation throughout the region, tightening loopholes and responding to criminal agility.
Legislation appears to be stricter than in other areas, however the new rules once enacted will bring the industry in line with other regulated industries, such as gambling and electronic banking. This provides far more robust controls on cryptocurrencies’ potential for use in money laundering, while changes in taxation do not mean that crypto’s vaunted anonymity comes under threat, as GlobalData associate analyst Harry Swain notes:
“Importantly, the European Parliament has reassured stakeholders that the regulatory measures do not seek to outlaw privacy-enhancing crypto technologies. In May 2023, the EU Crypto Initiative called on lawmakers to reconsider planned restrictions on privacy tools, advocating for a clear distinction between prohibited anonymous high-risk accounts and high-risk anonymising instruments.” iv
What effect this has on start-ups and new businesses remains to be seen, but there is a drive to standardises what to this day has been seen as a “Wild West” industry, with little oversight or regulation. Implementation of such wide-reaching legislation will likely cause some level of difficulty. However, Europe remains the second largest market for crypto, and firms are clearly willing to comply if it provides access to the trading bloc.
Asia-Pacific
In contrast to many western governments, Asia has been more proactive and open-minded about incorporating crypto assets and blockchain technologies into their formal economies. Singapore for example has been a world leader in providing funding for tech and crypto startups, in an attempt to further its reputation as a global hub for digital innovations and fintech.
As of December 2022, the Monetary Authority of Singapore (MAS) had authorised 11 cryptocurrency service providers, nine of which hold a major payment institution license and two of which hold a standard payment institution license. However, while 19% of people report using cryptocurrency, above global averages, this is not without some caution. The government has been reluctant to encourage retail investors and has prohibited cryptocurrency companies from advertising directly to individuals. Despite the ambition to become a global cryptocurrency hub, these assets’ volatile and speculative nature has meant that their adoption has been carefully managed.v
Just behind Singapore, the financial industry in Hong Kong is fast developing its crypto environment. The robust and stable regulatory environment in the territory is actually seen as a competitive advantage, as it reassures investors and the general public about the actual values involved in crypto - something many competitors have lacked. Both territories are leveraging their reputations as global financial centres, with open-minded and innovative approaches backed up by strong regulatory environments.
This is clearly a rapidly evolving area, with reality racing ahead of rules. As with any new financial technology, the rewards are there for any firm who can predict trends and understand changes as and when they happen.
Asia-Pacific
In contrast to many western governments, Asia has been more proactive and open-minded about incorporating crypto assets and blockchain technologies into their formal economies. Singapore for example has been a world leader in providing funding for tech and crypto startups, in an attempt to further its reputation as a global hub for digital innovations and fintech.
As of December 2022, the Monetary Authority of Singapore (MAS) had authorised 11 cryptocurrency service providers, nine of which hold a major payment institution license and two of which hold a standard payment institution license. However, while 19% of people report using cryptocurrency, above global averages, this is not without some caution. The government has been reluctant to encourage retail investors and has prohibited cryptocurrency companies from advertising directly to individuals. Despite the ambition to become a global cryptocurrency hub, these assets’ volatile and speculative nature has meant that their adoption has been carefully managed.v
Just behind Singapore, the financial industry in Hong Kong is fast developing its crypto environment. The robust and stable regulatory environment in the territory is actually seen as a competitive advantage, as it reassures investors and the general public about the actual values involved in crypto - something many competitors have lacked. Both territories are leveraging their reputations as global financial centres, with open-minded and innovative approaches backed up by strong regulatory environments.
This is clearly a rapidly evolving area, with reality racing ahead of rules. As with any new financial technology, the rewards are there for any firm who can predict trends and understand changes as and when they happen.
