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Crypto taxes: fiscal tool or regulatory measure? Explore global policies, their impact on businesses, and the debate on crypto classification.
It's understandable if you ask yourself: why tax crypto? Well, let's dive into that. Governments around the world have varying motivations for taxing cryptocurrencies. On one hand, there are fiscal needs. On the other, there's regulatory control. Some governments are interested in reducing the enthusiasm around crypto assets, especially by raising costs for businesses. A good example of this is seen in certain states in the US, where crypto exchanges are required to hold surety bonds or equivalent amounts in fiat currency. The goal? To lessen public faith in the asset's ability to generate wealth.
Then there's China. Back in September 2021, they enacted a complete ban on all crypto transactions and mining. The People’s Bank of China justified its action as a measure to "safeguard people's properties and maintain economic, financial, and social order." Quite clear that they wanted to maintain a firm grip over the financial system and prevent any illicit activities. Yet, the effect on Bitcoin prices was only short-lived, suggesting that regulatory measures alone may not be influential enough to sway the market's enthusiasm.
Take Italy's approach, for instance. In October 2024, they announced an increase in capital gains tax on crypto transactions from 26% to 42%. This decision was a part of plans to finance some expensive election promises whilst also cutting down the fiscal deficit. Interestingly, this didn't seem to faze Bitcoin prices much, as they continued to rise. The law, which would kick off from 2025, only targeted crypto sales exceeding 2,000 euros, leaving smaller transactions untouched. Analysts, however, were quick to warn that such rules may discourage future investments into the sector and endanger any prospective long-term tax revenue.
In contrast, the Czech Republic went a different route altogether in December 2024. They introduced a law that would incentivize Bitcoin trading by exempting crypto held for more than three years from taxes altogether. To qualify for this exemption, the maximum income over the three-year span was capped at 40 million Czech crowns (about $1.68 million). And if a trader earned less than 100,000 crowns from Bitcoin trading in a year, they would enjoy tax-free earnings. Prime Minister Petr Fiala stated that the law's intent was to foster healthy growth in the crypto market and modernize the financial system.
Then we have India. Their methods towards crypto taxation have been nothing short of a rollercoaster. Initially, they were looking at a complete ban on cryptocurrencies. But the government turned gears and decided to impose a 30% tax on crypto transactions instead. The hope was to better regulate the market while still pulling in some revenue. Despite the high tax rate, this move was viewed positively, as it was seen as a step toward legalizing crypto assets, lessening the fear of an outright ban.
It's clear that these diverse crypto tax policies across different countries could have a profound impact on international business transactions. For freelancers or remote workers, receiving payment in crypto means dealing with ordinary income tax, based on the fair market value at the time of receipt. But selling, trading, or spending those cryptocurrencies would trigger capital gains taxes, making it essential to grasp the tax rules in every country to avoid double taxation.
For businesses, having to navigate this wildly varied landscape of tax policy can be daunting. That's why the OECD's Crypto-Asset Reporting Framework (CARF) is so important. It aims to standardize reporting requirements across countries, reducing the complexity and risk of non-compliance for businesses operating globally. Sadly, the pseudonymous nature of crypto transactions and an absence of regulatory clarity in some jurisdictions complicate international business operations even further.
The classification of cryptocurrency as either currency or property has major implications for its use in business finance. If deemed currency, cryptocurrencies could be treated similarly to traditional currencies, conforming to accounting standards. Unfortunately, most jurisdictions, including the US, classify cryptocurrencies as property, which means capital gains tax applies.
If cryptocurrencies are classified as property, then they'd generally be accounted for under IAS 38 (Intangible Assets) or IAS 2 (Inventories), depending on their use. If a company holds cryptocurrencies as an asset, they'd be measured at fair value, with changes in fair value recognized in profit or loss.
If treated as property, transactions involving cryptocurrencies come with capital gains tax obligations. Gains or losses from sales or exchanges of cryptocurrencies become capital gains or losses, which could put pressure on the company’s tax liability.
Utilizing cryptocurrencies might improve transaction efficiency, especially in international dealings. But the volatility of cryptocurrencies makes things a bit tricky, calling for third-party vendors to help manage risks and compliance. Plus, they must adhere to regulatory requirements like anti-money laundering (AML) and know your customer (KYC) regulations. The decentralized nature of cryptocurrencies makes compliance difficult, to say the least.
Does taxation really have the power to cool down the market enthusiasm surrounding cryptocurrencies? That's a question worth pondering. While regulatory measures and steep tax rates can temporarily influence crypto prices, the long-term enthusiasm surrounding this asset class frequently remains intact. Despite India's 30% tax on crypto transactions, the market kept on growing. Many viewed the tax as a sign of legitimacy and a step towards legalization.
Much like Italy's tax hike plans, they didn't seem to deflate Bitcoin's price rise. This leads one to believe that market forces and investor sentiments might outweigh the impact of regulatory measures. The European Union's MiCA (Markets in Crypto Assets) framework, set to launch later in 2024, aims at nurturing growth in the sector, representing an effort to balance regulation with market development.
In summary, crypto taxation can serve both fiscal and regulatory functions, with varying effectiveness in curbing market enthusiasm. The classification of crypto as property or currency affects its use in business finance, accounting, and taxation. While the varying tax policies worldwide add complexity to international business transactions, efforts like the OECD's CARF are crucial for simplifying compliance. Ultimately, the long-term impact of taxation on crypto enthusiasm remains unclear, as market dynamics and investor sentiments continue to play a prominent role.
