Cryptocurrency-related investment options have increasingly been chosen over other investment alternatives within the past few years. Due to the sudden increase in its use and fluctuations in prices, it is inevitable for lawmakers to regulate this area to control the financing and verification with the laws such as AML, KYC, and taxation.
In this context, different laws have been enacted in various jurisdictions. One of the most notable regulations was taxes paid on revenues and value increases obtained from investment with cryptocurrency or any transaction.
This article examines the three jurisdictions, the United States, Canada, and Germany, regarding how they determine cryptocurrencies legally and approach crypto taxation.
- The United States
As per the Notice, 2014-21 issued by the Internal Revenue Service (“IRS”), the government agency operating in revenue administration in the United States, cryptocurrencies are considered property and not virtual assets. Therefore, capital and income gains should be notified to the IRS with the relevant forms, if necessary. The value is taxable based on capital gains or income as a general taxation concept. In taxing crypto, the value would be taxed at different rates. Therefore, it is essential to determine how to get the crypto and the period of holding it. IRS has always been really strict about the taxation of crypto due to the increase in income within the past few years. It has been experienced that the IRS brought a case against Coinbase in 2018, seeking to obtain the identity of customers who may not be reported their gains. Later, the IRS notified suspected taxpayers that may underreport their gains due to the unreported taxes of approximately $11 billion from cryptocurrency transactions.1
As it is known, cryptocurrency usage and price fluctuations have increased during 2021. Due to the price fluctuations, investors experienced huge gains and losses within the financial year. Therefore, it has been seen that a severe income has been obtained this year, leading to the increase of the issue of taxation becoming more critical. April 18, 2022, was the deadline to file the taxes and reporting of requests for the capital gains and income received within the year 2021. To establish the taxed rate of the value, it is essential to understand the difference between taxable and non-taxable events.2
Non-taxable events; Non-taxable events are the activities where the gains are not realized yet, such as holding the crypto without attempting to sell it. It is also possible to claim the deduction when the crypto is transferred directly to a charity organization. Transactions made between the wallets belonging to the same person, without selling, are also not taxable. Getting crypto as a gift or giving as a gift is not taxable with some conditions and limits, i.e., in order to avoid the questionability of taxation on gifts exceeding $15,000 per recipient, it might be useful to file a gift tax return. These activities are outside of the scope of taxation unless the person participates in taxable events such as staking or selling.3
Taxable events; After distinguishing whether the activities are taxable, it is then essential to understand the concepts of “capital gains” and “income.”
Capital gains taxes; It has been evaluated whether holding crypto is not taxable until it is sold or staked above. Selling crypto for cash more than it is paid in the first place is taxable. In the eyes of the IRS, spending, trading, and changing the currency to different coins is equal to selling the crypto since these activities lead to the crypto being sold technically. Therefore, converting and spending in exchange for services or goods is subject to capital gain taxes. However, that being said, it is always possible to deduct the losses on taxes if they are sold at a loss.4
Income taxes; Income taxes are determined by applying a tax rate to taxable income, i.e. total income after deducting allowable deductions, which can increase as income increases. Getting paid in crypto as an employee, providing services or goods in exchange for crypto, crypto mining activities, receiving crypto as awards or incentives, getting airdrop, getting staking rewards, and earning income that is earned a return by holding the crypto is considered as the types of income activities that might be taxed on the income. The tax rate may vary on the types of activities, i.e., for mining activities, earnings are based on the market value when mined coins are received.5
After determining what types of tax occurred, long-term and short-term gains and losses and gains should be evaluated to declare the tax at the correct rate.
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Tax filings will last until April 30 regarding the crypto assets cashed out in 2021. According to the guidance issued by Canada Revenue Agency (“CRA”), Canada’s superior body for taxation, it is required to pay crypto taxes when taxable events occur. In the eyes of CRA, the disposition of cryptocurrency refers to giving, selling, or transferring crypto. Therefore, taxable events occur if any cryptocurrency is used to pay for goods or services or sold, gifted, traded, and cashed out into fiat currency.6
Business Income; It is sometimes difficult to determine the business income as it should be evaluated case by case. However, there might be some indications such as commercial activities, promoting the goods or services, aiming to make a profit, managing business activities such as budgets, plans, etc. The CRA looks for the adventure of concern in the nature of the trade to determine it.7 CRA has also issued guidance for some transactions and examples, such as mining operations and operating a cryptocurrency exchange, to determine whether the activity has business purposes.8
The income tax rates may vary in the provinces in Canada. Rates are typically lower when it is earned enough income to qualify for the federal small business deduction. Most areas use the federal business limit as a guide, although they can set their own limits. A business that earns more than this limit will pay a higher tax rate.9
Cryptocurrency sales that do not result in business income and sell for more than the purchase price are considered capital gains by the CRA. Capital gains are the income for the tax year, and half of the capital gains would be taxed. Capital taxes are calculated in terms of the Inclusion Rate. This rate fluctuates on several occasions of the total Inclusion Rate, calculated with taxable capital gains and allowable capital losses.10
For more information, please visit https://www.canada.ca/en/revenue-agency.html.
Germany has been a crypto-friendly country for individuals to invest in in the last few years since the German Federal Central Tax Office (Bundeszentralamt für Steuern or “BZSt”) deemed cryptocurrency as private money or private asset and not property. Private assets have tax benefits. Although there are some strict guidelines on managing activities with cryptocurrencies, tax rules are more flexible than in other countries. Crypto-related transactions are subject to income tax since they are deemed private assets.
Taxes only occur when crypto is sold in the same year it is bought, which means only short-term trades, mining, and staking activities are taxable. Crypto gains will be excluded from the tax liability if held for more than one year. Additionally, crypto gains from sales worth €600 per year are also exempted which attracts individuals to be HODLers. Therefore, using cryptocurrencies for long-term investment by crypto traders who do not relocate them often can generate tax-free profits in Germany.11
Taxable events: Taxable events occur in the event of buying and selling the crypto within the same year by making €600 worth of profit and selling the crypto within the ten years from the date of buy, which was used in staking that gave interest, used as a way of earning an income such as staking, mining. Furthermore, sales made from crypto to crypto and crypto to fiat are also taxable with the benefits of deduction of paid fees. The taxable amount is the net profit earned from the cryptocurrency, and it is possible to deduct the related cost like energy assumptions in mining activities.12
In conclusion, crypto taxes are calculated based on the individual income tax rate used to tax short-term earnings. Taxes are due 31 of July each year. To declare the crypto totals of the income tax return, which should be declared if cryptocurrencies are bought and sold in the last year, it should be declared with an “other income” form that is separate from the income declaration form. Aside from this tax, a mandatory payment called solidarity tax have to be paid which is limited to 5.5% of income tax.13
There are different processes in each country for crypto taxation, which have been the subject of several discussions with the increasing crypto investment activities in recent years. This article aims to examine how the three mentioned countries, the United States, Canada, and Germany, determine cryptocurrencies legally and how they approach crypto taxation in general scope. For detailed information and processes, please review the explanations and necessary documents of the tax offices and agencies of the relevant countries.
In our next article, we will examine the concern of taxation in cryptocurrencies in countries that attracts attention.