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Implications of crypto assets in the value-added tax, income tax and property taxes

Pablo PorporattoPablo Porporatto    14 December 2020
Implications of crypto assets in the value-added tax, income tax and property taxes

Introduction

Crypto assets play a relevant role as “currencies” or means of payment and also as investment alternatives, with excellent expectations for future growth.

The market for these assets is constantly gaining space in terms of market capitalization and volume of operations, and signs of optimism are on the horizon. According to CoinGecko[1], the total market capitalization has increased by 44.1%, with US $ 60,000 million throughout the year 2019 and closing the year at US $ 180,000 million. The volume of operations had a much better year, growing by 600%, with more than US $ 50,000 million traded on average at the end of the year.

Bitcoin is the best performing asset in 2019, gaining 95% over the year despite its high volatility, between $ 3,500 and $ 13,500, vastly outpacing the annual returns of gold, S&P 500, and silver.

On this occasion, specific aspects of the tax treatment of the different taxes are reviewed, following the recent OECD report[2].

General aspects of the taxation of crypto assets.

As mentioned in a previous post[3], applications based on these new technologies, such as blockchain, pose challenges to policy makers in several areas, particularly taxation. The use, trade, and the level of market capitalization of these assets has increased, and their technological characteristics are evolving rapidly, posing permanent and growing challenges.

Some countries face these challenges by issuing guidelines with the applicable treatment. However, in most countries, and in the emerging academic literature, the OECD warns of a lack of comprehensive guidance or a framework for their tax treatment, which is due in part to the complexity of defining the treatment applicable to these assets, in a way that covers their different facets, as well as their complex and rapidly changing nature.

Specific tax aspects.

  • Value Added Tax

    The VAT treatment of virtual currencies is more consistent, among the countries analyzed in this report, than that of income taxes. In almost all countries, the exchange of virtual currencies is not subject to VAT. This applies whether the exchange is for legal tender or other virtual currencies. The mere activity of using virtual currencies to purchase goods or services is also outside the scope of VAT and, therefore, the tax should not be paid on the value of the virtual currencies themselves. Virtual currencies are a means of payment and the transaction is not a barter. However, the provision of taxable goods and services paid with virtual currencies remains covered by VAT, as applicable.

    With some exceptions, for example in France and Italy, the receipt of new tokens through mining[4] is also not subject to VAT.

    On the other hand, the OECD warns about possible practical difficulties related to the treatment of these transactions reached under the VAT rules, including the obligation to maintain the necessary records to establish valuations and possible deductions, as well as the registration in the tax of individuals or small merchants.

    In the countries of the European Union (EU), the Hedqvist[5] judicial decision,considering virtual currencies like official legal tender currencies, for the purposes of the VAT Directive, has been responsible for the tax treatment that is currently applied.

    In this case, the European Court of Justice ruled that the activity carried out by the defendant’s company[6]constitutes a provision of remunerated services, which is subject to VAT, although it is exempt, by virtue of its assimilation to the exchange of traditional currencies based on Article 135, paragraph 1, letter e), of Directive 2006/112 / EC.

    The Court made it clear that virtual currencies are not tangible assets in the terms of the Directive, and they do not have “any purpose other than being a means of payment” and that virtual currency bitcoin, “unlike credits, checks and other commercial papers (…) constitutes a means of direct payment between the operators that accept it”. In turn, the ruling defines virtual currencies as “non-traditional currencies”, ” different from currencies that are legal means of payment in one or more countries.” Finally, it is made clear that the operations related to virtual currencies constitute financial operations insofar as “they have been accepted by the parties to a transaction as an alternative means of payment to the legal means of payment and have no purpose other than that of being a means of payment”.

    Services related to virtual asset exchanges but not part of such exchanges are treated more widely. VAT is not charged in the vast majority of countries, typically due to exemptions or provisions related to financial services. In other countries, especially outside the EU, these services are subject to VAT rules as provision of taxed services.

  • Income tax

    Almost all the countries analyzed consider that virtual currencies are a form of property; normally, an intangible asset, a financial asset, or a “commodity”, and are, therefore, treated as assets that generate capital gains in most jurisdictions and, in a few cases, as generators of commercial income or other income.

    There are a number of taxable events in the income tax, most of which occur in relation to the provision of a virtual currency for payment. Although a small number of countries do not consider the exchange carried out by individuals as a taxable event, most countries consider the exchanges between virtual currencies and legal tender to generate a taxable event. Among these countries, a handful exempt exchanges between different types of tokens from tax, with a majority considering them taxable. With respect to the payment of goods, services or wages, the tax treatment of the underlying transaction remains unchanged. Finally, the plurality of countries surveyed indicated that the receipt of a new token via mining causes a taxable event, but a substantial minority indicated that the first taxable event occurs at the time of disposal, with a zero-cost basis. In Spain, the General Directorate of Taxes, in the binding consultations V3625-16 and V2908-17, understood that the mining activity is considered an economic activity under the terms of the Tax on Economic Activities.

    In many countries, the tax treatment of virtual currency transactions also varies according to the type of taxpayer. In occasional exchanges or personal transactions, most countries commonly give rise to taxable events for capital gains, and the deduction of losses is restricted. Reduced rates or waivers apply with a minimum holding period. On the other hand, business-level trading results in business income, where corporate tax rates apply, and losses are more likely to be deductible.

    Finally, virtual currency uses in which there is no countervalue, including gifts, theft, and general losses, are not regulated and if they are, the tax approaches vary.

  • Tax on Wealth

    Considering them as a form of property, it is likely that they are subject to property taxes in countries that charge them on inheritances, donations, or transfer taxes, although there is usually no accurate information.

Final Words

To conclude, it is worth highlighting the key questions that, according to this OECD Report, States should ask themselves:

  • How to treat the income generated by crypto assets in direct and indirect taxes? Specifically:

    • – If there is property, should the stock of crypto assets be included in the Wealth Taxes? If so, how should they be valued?
    • – How should VAT regimes treat the creation, acquisition, possession, and transfer of these assets?
  • What are the political implications of the different tax treatments?
  • How can the risks of evasion and other crimes (e.g., paying for threats and kidnappings, laundering of illegal assets, paying bribes for corruption, etc.) be effectively detected and addressed?
  • How to improve transparency, including the information that the Tax Administrations need to know for their control and collection tasks, for example, the possibility of paying taxes with these assets?

[1]CoinGecko Annual Report for 2019.
[2]OECD (2020), Taxing Virtual Currencies: An Overview Of Tax Treatments And Emerging Tax Policy Issues, OECD, Paris. www.oecd.org/tax/tax-policy/taxing-virtual-currencies-an-overview-of-tax-treatments-and-emerging-tax-policyissues.htm.
[3]The first part can be consulted at: https://www.ciat.org/ciatblog-recomendaciones-de-ocde-sobre-el-tratamiento-tributario-y-la-necesaria-transparencia-internacional-de-las-criptomonedas/
[4]Cryptocurrency “mining” is an emulation of traditional mining. Software and hardware are used to extract value. It is a process in which transactions are validated and grouped, and then added to its “blockchain”, from which rewards are generated, which are made up of the commissions paid by users so that their transactions are verified by a miner and included in a block and on the other hand the new crypto-assets issued.
[5]Decision of the Court of Justice of the European Union Case C-264/14 (Skatteverket / David Hedqvist) of October 22, 2015.
[6]Its main activity was the exchange of official or legal tender currencies for bidirectional virtual currencies (that is, convertible or exchangeable for official currencies, for example, bitcoins). The profit obtained by the company is the margin included in the calculation of exchange rates to sell and buy such virtual currencies.

 

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax. 

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