Part 1 of this series discussed the basics of cryptocurrencies and the challenges tax authorities face as they attempt to construct a tax and regulatory framework for them. Part 2 will consider how some of the world’s major economies are meeting this challenge.
Countries’ Stance on Crypto
As the transformation of cryptocurrencies from speculative investment to stablemate in a balanced portfolio continues to gather pace, governments around the world remain divided on how best to regulate them. The table below provides a brief overview of the cryptocurrency landscape across some of the major economies.
Please note that the tax implications mentioned above are from an investor perspective and do not cover the scenario of businesses/individuals engaged in crypto trading/exchange/mining.
Although it is difficult to find a consistent legal approach at the state level, the U.S. continues to make progress in developing federal-level cryptocurrency legislation.
The Securities and Exchange Commission (SEC) typically views cryptocurrency as a security and applies securities laws to digital wallets comprehensively in an approach that affects both exchanges and investors. The Commodity Futures Trading Commission (CFTC) recognizes Bitcoin and Ethereum as commodities and allows other virtual and cryptocurrency derivatives to trade publicly on exchanges that it regulates or supervises. The U.S. Treasury calls cryptocurrency a currency, and the Internal Revenue Service (IRS) treats it as digital property.
Crypto exchanges in the U.S. fall under the regulatory scope of the Bank Secrecy Act 1970 (BSA) and must register with the Financial Crimes Enforcement Network (FinCEN). Along with BSA regulations, they are also required to comply with anti-money laundering (AML) and combating the financing of terrorism (CFT) obligations. Accordingly, cryptocurrency exchange service providers must obtain the requisite license from FinCEN, implement an AML/CFT and sanctions program, maintain appropriate records, and submit reports to the relevant authorities.
The U.S. Treasury is cognizant of the urgent need for the creation of crypto regulations to combat global and domestic criminal activities. The Justice Department continues to coordinate with the SEC, CFTC, and other agencies over future cryptocurrency regulations to ensure effective consumer protection and smoother regulatory oversight. U.S. lawmakers remain keen to bring cryptocurrencies under regulatory consideration, given the potential destabilizing effect they may have on the globally dominant U.S. dollar and also the impact that private and centrally banked currencies might have.
Canadian regulators have been fairly proactive in their stance toward crypto and digital currencies. In February 2021, Canada became the first country to approve a Bitcoin exchange-traded fund. Furthermore, the Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada have clarified that crypto trading platforms and dealers in Canada must register with provincial regulators.
As early as 2014, Canada brought entities dealing in virtual currencies under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. Also, in a bid to protect the public, Canada classifies crypto investment firms as money service businesses and requires that they register with the Financial Transactions and Reports Analysis Center of Canada. The Canada Revenue Agency treats cryptocurrency in a similar way to other commodities and has taxed cryptocurrencies since 2013.
While regulations in Canada are evolving, there are currently no signs of significant additional legislation on the horizon.
In the U.K., cryptocurrency exchanges must register with the Financial Conduct Authority and are prohibited from offering crypto derivatives trading. The U.K. has also introduced cryptocurrency-specific requirements relating to know-your-customer, alongside the abovementioned AML and CFT.
The country’s approach to cryptocurrency regulations has been measured but has matured in the post-Brexit financial landscape. Although there is no definitive policy towards the taxation of crypto assets (including cryptocurrency) in the U.K., the national tax authority, Her Majesty’s Revenue & Customs (HMRC), published two policy papers in 2018 and 2019 relating to the taxation of crypto assets for individuals and businesses. Cryptocurrency is considered to be property but not legal tender. Although investors still pay capital gains tax on crypto trading profits, taxability depends on the crypto activities undertaken and who engages in the transaction.
Having left the EU in 2020, it remains to be seen if the U.K.’s cryptocurrency regulations will remain largely consistent with the EU’s crypto-regulatory landscape. Currently, there is no specific U.K. crypto legislation approaching, although H.M. Treasury guidance, issued in January 2021 via the Crypto Asset Task Force, emphasizes the U.K.’s intention to consult on bringing certain cryptocurrencies under the scope of “financial promotions regulation.” In February 2022, this guidance was updated to include information relating to the taxation of cryptocurrency transactions involving decentralized finance.
Japan currently has the world’s most progressive regulatory climate for cryptocurrencies. It is the world’s largest market for Bitcoin and considers cryptocurrencies to be legal property under the Payment Services Act. Japan’s Financial Services Agency governs all the cryptocurrency trading platforms in Japan and ensures compliance with AML/CFT obligations.
Under the Payment Services Act, only a business with a competent local financial bureau is allowed to operate as a cryptocurrency exchange. However, in keeping with Japan’s progressive stance, foreign cryptocurrency exchanges are permitted to register where they are permitted to display an equivalent registration standard in their host country.
In Japan, exchange-based regulations are primarily focused on protection of market integrity, users and investors. Exchanges must observe certain record-keeping requirements and provide the Financial Services Agency with an annual report, including checking customer identification and covering custodian services providers.
In April 2020, Japan became the first country to self-regulate. It formed two self-regulatory bodies—the Japanese Virtual Currency Exchange Association (JVCEA) and the Japan Security Token Offering (STO) Association. All exchanges are members of the JVCEA while five major Japanese financial institutions collaborated to establish the Japan STO Association. The JVCEA and the STO Association work to provide assistance to unlicensed exchanges and promote regulatory compliance.
From a taxation perspective, Japan treats trading gains generated from cryptocurrency as “miscellaneous income” and taxes investors accordingly. However, nonresidents are taxed at a flat 20% rate on income, which they need to pay upon leaving Japan.
Australia has a progressive approach in its implementation of crypto regulations.
Exchanges can operate in the country provided they register with the Australian Transaction Reports and Analysis Center (AUSTRAC) and meet specific AML/CTF obligations. In 2019, the Australian Securities and Investments Commission introduced regulatory requirements for initial coin offerings (ICOs) and banned exchanges from offering privacy coins.
In 2017, the Australian government declared that cryptocurrencies were legal and therefore subject to section 5 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and associated rules. Parliament acknowledged that Bitcoin (and cryptocurrencies that shared its characteristics) should be treated as property and subject to capital gains tax. It also resolved the controversial issue of double taxation under Australia’s goods and services tax.
In 2018, AUSTRAC announced the implementation of more robust cryptocurrency exchange regulations.
Singapore has been in the front line of technology adoption and advancement. With regard to crypto, it has reflected a positive attitude, and is considered Asia’s leading cryptofinance hub. Singapore classifies cryptocurrency as property but not legal tender. The Monetary Authority of Singapore (MAS) licenses and regulates exchanges as outlined in the Payment Services Act. The Blockchain and Cryptocurrency Regulation 2020 was enacted to regulate cryptocurrency and accelerate its adoption.
In Singapore, cryptocurrency exchanges and trading are legal. The Inland Revenue Authority of Singapore treats Bitcoin as “goods” taxable under its goods and services tax. Singapore’s reputation as a crypto-friendly regulatory environment is based on strong government support and on its status as a safe tax haven: Long-term capital gains are not taxed. However, gains made by companies that regularly transact in cryptocurrency are taxed as income.
As the Payment Services Act has only recently taken effect, there will inevitably be an adjustment period as crypto businesses adapt to the new legislative environment. The Act in many ways is aligned with the Financial Action Task Force’s most recent recommendations. However, MAS is likely to follow up with additional regulations in an effort to further align its position. Indeed, in July 2020, MAS proposed new financial sector regulations with consequences for the crypto industry: Under the proposals MAS is seeking to introduce stronger AML/CFT standards for cryptocurrency service providers and stricter requirements for technology risk management in financial institutions.
In South Korea, crypto exchanges are legal, but not cryptocurrencies. The South Korean Financial Supervisory Service oversees crypto exchange regulation. In March 2021, South Korea passed legislation to strengthen the supervision of digital assets, mandating that all cryptocurrency exchanges must register with the Korea Financial Intelligence Unit.
So, cryptocurrencies are neither legal tender nor financial assets: Hence, cryptocurrency transactions are exempted from taxes. However, South Korea is expected to launch a revised framework for taxing crypto transactions in 2022, and is also expected to align its framework for cryptocurrencies with its anti-money laundering policies.
China does not class cryptocurrencies as legal tender, but classifies them as property for the purposes of determining inheritance. In 2013, the People’s Bank of China (PBOC) banned crypto exchanges from operating in the country, reasoning that they facilitated public financing without approval, and it went further in 2017 by banning ICOs and domestic cryptocurrency exchanges.
The world’s largest crypto exchange, Binance, initially launched in China, eventually had to relocate its headquarters to the Cayman Islands in 2017 following the crackdown. Also, in May 2021, China banned bitcoin mining, forcing many to close their operations entirely or relocate to jurisdictions with a more favorable regulatory environment.
There is no sign that China intends to lift or loosen its ban on cryptocurrencies any time soon, but recent developments suggest that the government intends to position the country as a leader in the crypto space. These developments consist of statements by Chinese government officials endorsing blockchain technology, the extensive trial and testing of the central bank’s e-CNY digital currency (the digital yuan), and a joint venture with SWIFT (the international payment and cross-border payment gateway).
China’s central bank has been working on introducing its official digital currency since 2012, and efforts have apparently accelerated: To this end, in late 2020, the Chinese government drafted a law that conferred legal status on the PBOC’s digital yuan.
The Chinese government has also expressed support for the implementation of a global regulatory framework for cryptocurrencies.
Currently, there is no regulation of, or any ban on the use of, cryptocurrencies in India. Cryptocurrencies are not legal tender. In 2018, the Reserve Bank of India (RBI) banned banks and financial institutions from transacting in virtual currencies. The RBI also prohibited the trading of cryptocurrencies on domestic exchanges and gave existing exchanges until July 6, 2018, to wind down. In a landmark 2020 decision, however, the Supreme Court ruled the ban unconstitutional, reversed the prohibition and allowed exchanges to reopen.
On Feb. 1, 2022, Finance Minister Nirmala Sitharaman, presenting the Union Budget for 2022–23, proposed taxing virtual digital assets. The proposals include a definition of such assets, their taxability, deductions and losses, taxation of gifts of virtual assets, and the imposition of a withholding tax (tax deducted at source) on such transactions.
A special tax rate of 30% will be imposed on income or gains from the transfer of any virtual asset, irrespective of how long it has been held. No deduction will be allowed in respect of expenses incurred, besides the cost of acquisition. Also, losses on account of such investments will not be allowed to be set off or carried forward. Gifts of virtual assets will be taxed in the hands of the recipient.
The finance minister also proposed the introduction, starting in 2022–23, of a digital rupee, using blockchain and other technologies, to be issued by the RBI. This is expected to boost the digital economy and reflects the government’s solid plan to create a public digital currency for India. However, ambiguity still exists in the government’s stance on the issue of private cryptocurrencies being traded in the market.
The introduction of a digital rupee based on blockchain technology and the inclusion of virtual digital assets in the tax net, such as cryptocurrencies and non-fungible tokens, can be seen as the first steps on the road to crypto’s eventual legal recognition by the government.
The government has indicated that it wants to foster innovation in crypto and ensure that all kinds of experiments can take place in the crypto world. Its endeavors appear to be in tandem with an evolving global framework for cryptocurrency. In the meantime, however, there is a need to ensure consumer protection and also to tax cryptocurrency transactions. In December 2021, Prime Minister Narendra Modi, at the “Summit for Democracy” hosted by U.S. President Joe Biden, called for united efforts to shape global norms for social media and cryptocurrencies so that they could help “empower democracy and not … undermine it”.
Although the EU was one of the first to make cryptocurrency legal, euro-backed member states may restrict the introduction of their own cryptocurrencies. There is no specific regulation passed by the EU that governs crypto activities, but the AML Directive directs crypto exchanges to follow the bloc’s anti-money laundering regulations.
The EU is actively exploring further cryptocurrency regulations. The European Central Bank is exploring the possibility of issuing its own digital currency, and simultaneously promoting the adoption of a single AML/CFT rule book which member states would be obliged to follow without exception.
At the beginning of 2020, the European Commission announced a public consultation initiative, seeking guidance on where and how crypto assets fit into the EU’s existing regulatory framework. In September 2020, the Commission followed up with a new proposal which was termed the “Markets in Crypto-Assets” Regulation. The proposal sets out draft regulatory measures for cryptocurrencies, including the introduction of a new licensing system for crypto-asset issuers, industry conduct rules, and new consumer protections.
In 2018, the Mexican government published, in the Official Federal Gazette, the Fintech Law that regulates financial technology institutions. The purpose of this new law was solely to regulate cryptocurrencies within Mexico’s financial system.
Switzerland has been recognized as adopting a progressive stance towards cryptocurrency regulations. Cryptocurrencies are legal and are accepted as payment in some contexts.
Crypto and virtual currencies are classified as assets/property. Exchanges are legal, and depending on the nature of the assets and investor protections, virtual currency exchanges and platforms are considered equivalent to financial institutions, so they must ensure compliance with local AML/CTF and consumer protection obligations. The Federal Tax Administration considers cryptocurrencies to be assets; they are subject to Swiss wealth, income, and capital gains taxes and must be declared on annual tax returns.
However, it is important to note that capital gains arising from a private wealth asset are exempt from income tax. This rule also applies to capital gains from cryptocurrency. The gains realized from the disposal of cryptocurrency are therefore not subject to tax and, conversely, any losses arising from the disposal of cryptocurrency assets are not tax-deductible.
Switzerland’s government has indicated that it will keep working towards a regulatory environment that is friendly to cryptocurrencies. In late 2020, the Department of Finance commenced a consultation on new blanket cryptocurrency regulations that would enable it to take control of blockchain technology without stifling innovation.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Anshu Khanna is a Partner with Nangia Andersen LLP, a member firm of Andersen Global.
The author may be contacted at: firstname.lastname@example.org