G-20 Eyes Tax Gold Mine in ‘Sexy’ Crypto Market

Tax authorities across the world, dazzled by potential revenue, have taken notice of the cryptocurrency market—despite its many booms and busts.

For tax authorities, the cryptocurrency market could be a rich source of revenue that has gone largely untapped—the market once soared in value to about $800 billion. But in their quest for cash, tax authorities have had to create new definitions and regulatory approaches.

And investors will stay interested as long as they see the “rapid rise of this very modern, very sexy, and very futuristic investment vehicle,” said Anna Schneider, an analyst at MyPrivateBanking Research, a firm based near Zurich, Switzerland that focuses on wealth management and financial services research. They’re more likely to hear about and focus on its “amazing potential,” rather than its risks and volatility, she said.

The appetite for investment in the sector isn’t abating—London-based security company G4S announced plans Oct. 17 to offer customers a new service for secure offline storage of cryptocurrency assets. And Boston-based Fidelity Investments Oct. 15 launched a digital asset service to aid hedge funds, family offices and market intermediaries interested in cryptocurrency trading.

Yet, in a stark warning to regulators in the U.S., economist Nouriel Roubini—noted for calling the 2008 financial crisis—bludgeoned the credibility of cyrptocurrencies in testimony before the Senate Banking Committee on Oct. 11.

“The entire cryptocurrency land has now gone into a crypto-apocalypse as the mother and father of all bubbles has now gone bust,” Roubini said in testimony to the committee, adding that since the peak of the digital currency “bubble” late last year, bitcoin has fallen by 70 percent in value.

“Until now, Bitcoin’s only real use has been to facilitate illegal activities such as drug transactions, tax evasion, avoidance of capital controls, or money laundering,” Roubini said.

G-20 Moves

Group of 20 (G-20) member countries have been trying to find ways to regulate cryptocurrency. Governments hope to end the anonymity that currently characterizes the digital currency sphere, by compelling reporting of income or capital gains made through trading.

Some countries have begun to move unilaterally. Bloomberg Tax has been tracking progress across the G-20 major economies as they race to write rules for cryptocurrency.

Revenue agencies face a number of challenges, from simply defining the digital tokens to deciding on an approach.

“Crypto is different enough from things that have come before, like cash, stock, or commodities,” said Andrew Silverman, a Bloomberg Intelligence tax policy analyst.

The cryptocurrency market is now worth about $211 billion, about 13,000 percent higher than its value five years ago, according to industry website CoinMarketCap.com.

Defining Cryptocurrency

Different definitions of cryptocurrency can force traders and investors to keep track of different sets of rules. At times, even agencies within the same jurisdiction take separate approaches.

The Canada Revenue Agency in 2013 said cryptocurrency should be treated as a commodity for tax purposes. This means that tax rules governing barter transactions also apply to cryptocurrencies.

In the U.S., the Internal Revenue Service treats cryptocurrency as property, meaning taxpayers must report gain or loss when they sell their cryptocurrency assets or exchange them for other types of property, including other forms of cryptocurrency.

But the U.S. Commodity Futures Trading Commission has designated bitcoin and other virtual currencies as commodities, covered by the Commodity Exchange Act.

What’s more, Jay Clayton, the chairman of the U.S. Securities and Exchange Commission told CNBC in June that tokens or digital assets used in initial coin offerings (ICOs) are securities. An ICO is an unregulated means of raising capital for new cryptocurrency ventures.

China—with an estimated 71 percent of the hash rate, the total processing power currently being used to mine bitcoin—hasn’t adopted any cryptocurrency-specific legislation.

‘Very Problematic’

ICOs are wholly uncharted territory for most countries.

“Things like ICOs are very problematic,” Silverman said. “Is it like an IPO,” or initial public offering, “or like a sale of property or inventory?”

In Japan, many ICO projects have stopped, said Kenji Yanagisawa, founder at Yanagisawa and Co. in Tokyo, Japan. An April industry-backed report from Tama University in Tokyo called for more explicit guidance on ICOs to protect investors and provide clarity.

“Removal of scams is very good. But many wholesome ICO projects also stopped. It is very regrettable at startups in Japan,” Yanagisawa said.

The French National Assembly approved the 2019 Finance Bill Oct. 9, referring the bill to the Committee on Finance. The bill includes a framework for the ICOs, which could shield companies from facing surprise tax bills.

Taxing Cryptocurrency

Even among countries that have defined cryptocurrency for trading purposes, tax rules are often slower to follow.

South Africa is on track to be among the first to issue targeted laws that govern the taxation of cryptocurrencies, if proposed amendments to current tax laws go ahead. The proposed measures bring important changes, like setting the country’s position on when it applies income tax and VAT to cryptocurrency transactions and gains.

While Germany in June confirmed it has two separate positions on when to tax cryptocurrency, more work is needed.

“In the direct tax field, we have literally nothing,” said Jens Schaeperclaus, director of tax and legal at Deloitte in Germany.

The uneven treatment of cryptocurrencies around the world could end up creating an environment ripe for tax arbitrage.

“You can pick your tax treatment” to be most favorable, Silverman said. “I just can’t imagine we’re going to have a multilateral approach.”

Loosening Or Tightening?

G-20 countries are also in a delicate balancing act—some are hoping to ease regulations on cryptocurrencies to attract investors.

While Japan is known for having strict rules on cryptocurrency, its government is under pressure to consider loosening its rules to fuel the industry. The country makes up nearly 60 percent of the global transaction volume for bitcoin, according to its Financial Services Agency.

Meanwhile, the IRS in 2016 issued a summons demanding records from Coinbase Inc., one of the world’s largest cryptocurrency exchanges, to determine if its customers were using digital assets to dodge the taxman. A U.S. court approved a narrowed version of the summons in November 2017.

Coming Up Next

Bitcoin’s value fell 20 percent within 24 hours of Goldman Sachs CEO Lloyd Blankfein calling it a “vehicle to perpetrate fraud,” according to an Oct. 17 Bloomberg Intelligence report.

Already aware of the potential for fraud and criminal activity, the U.S., the U.K., Canada, Australia, and the Netherlands announced in June they would band together to focus on the use of cryptocurrency in drug trafficking and other illegal activity.

The Organization for Economic Cooperation and Development is in the “preliminary phase” of assessing cryptocurrency tax questions, Pascal Saint-Amans, who heads the OECD’s Center for Tax Policy and Administration, told Bloomberg Tax Sept. 7.

The OECD will report to the international taskforce on the digital economy in December.

The Financial Action Task Force (FATF), an intergovernmental organization, will consider addressing virtual currency as part of its benchmark FATF Recommendations to fight money laundering.

The OECD could “piggy back on what’s being done” by the FATF, Philip Kerfs, who co-heads the international cooperation unit at the OECD’s Center for Tax Policy and Administration, told Bloomberg News.

The U.K. tax authority, Her Majesty’s Revenue and Customs, is expecting “huge gains” among individuals who have invested in crypto over the past year, and it hopes that the new guidance will help with self-assessment tax return deadlines for the start of next year.

Tax agencies “will likely become better at linking cryptocurrency activities to specific taxpayers and subjecting them to tax accordingly,” Alexander Demner, a partner at Thorsteinssons LLP, told Bloomberg Tax. in an email. “The trend towards greater international cooperation will also likely continue to grow over time.”