If you’ve gained some extra money from selling your bitcoin (or other cryptocurrencies, digital currencies, digital coins - what ever you'd like to call them) recently, but aren’t sure whether you should declare the profits on your tax form, you’re not the only one.
This article looks at how other countries are taxing cryptocurrencies. It is not advising you to invest in cryptocurrencies now, or in the future. You should talk to a qualified financial advisor before investing. Nor is this article giving you tax advice. Talk to your accountant about your tax obligations, if you have sold some cryptocurrency investments recently. If your eyes glaze over at the thought of tax, finappster can help you keep track of your cryptocurrency purchases, in case you need to report them later. Sign up now.
Many people simply aren’t aware of their tax obligations. But more to the point, many tax offices around of the world are still grappling with how to tax cryptocurrencies.
It comes down to how cryptocurrencies are used and the tax treatment for each.
Let's look at how the US sees the different types of cryptocurrency transactions and their tax implications:
In the US, the Internal Revenue Service (IRS) has treated cryptocurrencies as ‘property’ (a.k.a. an ‘asset’) for Capital Gains Tax (CGT) purposes since 2014.
Trading cryptocurrencies produces capital gains or losses, where losses can be used to offset gains and reduce tax. Whether it’s exchanged for another token, or converted into US (or any other) currency it still creates a ‘taxable event’ which generates capital gains or losses.
It’s been suggested that to minimise tax that investors buying cryptocurrency should buy and hold for at least one year. This is because, in the US, short-term (less than one year) capital gains are taxed at your normal income tax rate.
Depending on your income bracket for 2017, the federal tax rate can be anywhere from 10.00 percent to 39.60 percent. However, long-term gains are taxed at a reduced rate (15.00 percent to 23.80 percent, depending on your bracket).
Taxing cryptocurrency as an investment
The Australian Tax Office recently issued a statement where they now consider cryptocurrencies as an ‘asset’ for CGT purposes, meaning that money gained from selling cryptocurrencies should be subject to CGT. This means you’ll be taxed at your normal income tax rate when you declare the net return of your cryptocurrency sales on your tax returns this year. You may get some tax breaks, depending on how long you held your cryptocurrency for though.
Luckily, New Zealand does not have CGT (yet) but Inland Revenue (IRD) have also recently considered how to tax cryptocurrency. Their advice to cryptocurrency investors?
"Cryptocurrency is treated as property for tax purposes. There are no special tax rules for cryptocurrencies – ordinary tax rules apply."
That is, pay tax on the profit made by selling a currency, only if that currency was bought with the intention of resale.
There is no precedent to confirm a length of time with which you held your cryptocurrency, that would help prove whether you brought them with the intention to sell them. However, the regularity with which you buy and sell them, and the level of profit you make on the sale of each, may determine your intention.
So, if you spent $1,000 on cryptocurrency and sold them for $1,800, you’d pay tax on that $800 profit.
In New Zealand, your Prescribed Investor Tax Rate (PIR) may differ slightly to your personal income tax rate, but your total income is considered in determining the rate your investments are taxed at. For example:
* Salary / wage amount is each year, for two years. If for the two previous income years you qualify for two rates, your PIR is the lower rate.
Any way you look at it, and depending on the additional costs to buy and sell this, your return on investment is looking pretty good.
Yet if you could only resell your units for $600, your $400 loss (and possibly other expenses) would be tax deductible. Be careful of doing this though. If you start to claim tax on your expenses and losses, you’re more likely to get taxed on your profits, even if your ‘intention’ was not to resell them.
What’s so challenging about that?
The uncertainty comes from situations where we would use cryptocurrency in multiple ways, and which tax treatment should be applied.
For example, in the US, Bitcoin is also subject to state income tax. So, if you received cryptocurrency payments in exchange for products or services, or as a salary, or mining coins, or participated in an Initial Coin Offerings, you’ll have received ordinary income and been taxed at your personal income tax rate. But spending cryptocurrency is a tax event and may generate capital gains or losses, which can be short-term or long-term. For example, say you bought one coin for $100. If that coin was then worth $200 and you bought a $200 gift card, there is a $100 taxable gain. Depending on the holding period, it could be a short- or long-term capital gain subject to different rates. Another situation may be an air drop, which is considered ordinary income on the day of the air drop. That value will become the basis of the coin. When it's sold, exchanged, etc., there will be a capital gain.
Another challenge for any tax office is ensuring that we (the consumers, and businesses) are not taxed more than once.
Taxing Goods and Services Tax (GST) on cryptocurrency
The German Federal Ministry said, on March 1, that it would consider Bitcoin to be exempt from taxes as long as it is used as a means of payment.
This is after the Australian Government confirmed, in May 2017, that it would treat Bitcoin “just like money,” and that it would no longer be subject to double taxation.
Double taxation would arise from a situation where (for example) you purchased a unit of cryptocurrency from a GST-registered business (which would be subject to GST) and then any subsequent purchases from a GST-registered business using the cryptocurrency would also be subject to GST. Deeming cryptocurrencies to be currency for GST purposes would remove GST from the sale or purchase of any units, solving the double tax problem.
To declare, or not to declare?
In the US, the IRS are asking Bitcoin users to declare their receipt of related income. There’s a significant difference between criminal penalties and simply paying interest. Common fees include a “substantial understatement” penalty and “negligence or disregard of the rules” penalty, which are an additional 20.00 percent of the net understatement of tax. If the IRS thinks you knew about the bitcoin tax rates and laws and faked your tax return anyway, it will charge you an additional 75.00 percent of the underpayment for fraud. Despite this, only 0.04 percent of personal finance service Credit Karma’s customers reported cryptocurrency transactions on their tax returns this year.
The IRD in New Zealand has just released specific guidance on taxing your cryptocurrency income. And you shouldn’t assume you can hide behind the anonymity of Blockchain technology.
Our challenge is that many digital exchanges are not broker-regulated by tax offices, which makes matters more complicated for preparing tax documents. Exchanges do not issue a tax form, nor do they calculate gains or cost basis for you. Many don't even allow transacting in dollars, instead opting for Ethereum.
This means that self-reporting is necessary. You would need to use your account transaction history with records that include dates of earning, buying or exchanging coins, market value at that date to calculate cost basis and the date and sales proceeds when a coin is sold, exchanged or spent.
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