Bitcoin is a peer-to-peer payment system created in 2009. It is the first open source digital currency, managed by an open source software algorithm that uses the global internet network both to create the Bitcoins as well as to record and verify transactions.
Compared to a standard fiat currency, such as dollars or euros, the key distinguishing feature of Bitcoin is that the quantity of units in circulation is not controlled by a person, group, company, central authority, or government, but a software algorithm controls the amount of Bitcoins issued.
Bitcoins can be used to buy goods or services worldwide, provided that transaction partners accept Bitcoin as a mean of payment. A transaction implies that Bitcoin owners transfer their ownership of a certain number of Bitcoins, in exchange for goods and services. An increasing number of companies accept Bitcoins as payments for their goods and services. Bitcoins can be also exchanged for other currencies.
To summarize, Bitcoin is a fiat currency without an intrinsic value. In contrast to standard government backed fiat currencies, e.g. dollar, euro, Bitcoin is developed outside of an underlying economy or issuing institution, implying that there are no macroeconomic fundamentals that would determine its price formation.
Bitcoin is the largest cryptocurrency in the world with the market cap at $129 billion with current circulating supply of 16,8 coins. Nowadays, Bitcoin is widely used, not only as payment method, but also as investment instruments. Bitcoin created a legal vacuum that was gradually filled with regulations.
Bitcoin is considered as a substitute for real money and has a value in real money. It means that it can be exchanged to traditional currencies such as EUR, USD, and GBP etc. Although Bitcoin is not fully regulated and has not obtained a legal tender status in many countries, authorities have considered its significance and implemented specific tax treatments.
This article will cover some of the most important world countries and their tax treatment of Bitcoin and other cryptocurrencies.
The Italian Tax Authorities have issued guidance on the value-added tax (VAT) treatment of financial transactions in connection to the virtual currency, Bitcoin. In their Resolution no. 72, from 2 September 2016, it is explained that Bitcoin transactions undertaken by economic operators (businesses) should be considered to be VAT (value added tax) exempt services with no right of deduction. The Tax Authorities consider that Bitcoin transactions should be included in the definition of “transactions related to foreign currency with an official exchange rate and credits in foreign currency,” regulated by Article 10, paragraph 3 of the Italian VAT law.
In the absence of specific national VAT provisions, this Italian guidance on Bitcoin transactions references the decision reached by the Court of Justice of the European Union (CJEU) in a recent case 2. The CJEU recognized that, from a VAT perspective, Bitcoin exchange transactions constitute a supply of services for consideration if the transaction consists in the exchange of a traditional currency for “Bitcoin” virtual currency (or vice versa) in return for payment of a sum equal to the difference between the price paid by the operator to purchase the currency and the price at which he sells that currency to his clients.
The small island in Mediterranean is turning into a real crypto paradis. It’s unsurprising that Malta is also included on this list. Malta has made a brand for itself as one of the go-to destinations for the rich and famous, but more recently, for being the best pro-crypto legislation state of them all. Any EU citizen that holds crypto for longer than 183 days is exempt of all crypto taxes, which makes it a very good (and exotic) proposition for all EU crypto HOLDers and investors.
German’s BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht – Federal Financial Supervisory Authority), considers cryptocurrencies as ordinary intangible assets for the purpose of tax treatment. The specific tax treatment of Bitcoin transactions are dependent on whether the transactions are made in the private domain or in the business sphere.
For retail investors, capital gains made from investing in Bitcoin are completely tax-exempt after a holding period of at least one year. If the sale transaction is made inside the one-year holding period and if the capital gains are under of EUR 600 p.a., the tax exemption applies. It is important to note that all transactions in the relevant year are taken into consideration, not only Bitcoin transactions.
Taxation of the capital gains comes from the difference between the sales prices achieved and the purchase cost and advertising cost of the Bitcoins used (for example, purchase price of the previously acquired Bitcoins or cost for the mining of the Bitcoins). Corresponding losses can be offset and can also both be carried back as well as carried forward in future years and can thus be offset against profits from private sales transactions. In determining the acquisition cost, the problem frequently arises that the Bitcoins used were acquired at very different times at different prices / acquisition cost.
In Austria it is similar to Germany, individuals holding cryptocurrencies as non-business assets, any gains (e.g., upon the conversion of Bitcoin into EUR) are tax-free if realized upon expiry of the one-year “speculation period”, but are taxable if realized before that point in time (with a tax-exempt amount of EUR 440 p.a. applying).
If you purchases a specific cryptocurrency at different times and then sell a portion of your holdings from one wallet, you can freely determine which portion was sold, provided that you can fully document the acquisition dates and the acquisition costs of the individual purchases; otherwise the FIFO (first in first out) method is to apply when calculating the taxable income.
The rules mentioned above (taxable within one year, tax-free after one year) shall not apply if cryptocurrencies are “rented out”, with “interest” being earned. In such case, a later sale would lead to capital gains that qualify as investment income, which is taxable at a flat income tax rate of 27.5% (irrespective of the holding period).
Danish Tax Council has decided that you do not have to pay taxes if you make capital gains by buying or selling the virtual currency.
The Chairman of the Tax Council, Hanne Søgaard Hansen said: „If you find a gain on your Bitcoins, it is tax-free. Like selling a painting, and it’s worth it, it’s tax-free. Bitcoins are not commercially justified in a company. This means that you regard Bitcoins as a private asset.“
Meaning that you do not have to pay taxes on your profits made from trading cryptocurrency, but also you are not entitled to a deduction if you make loss on trading.
The decision was made under the Tax Control Act and more details can be found here.
Slovenia is another tax haven country for Bitcoin investors. Under the Act of Payment Services and Systems, Bitcoin virtual currency shall not be considered a monetary asset. Also, Bitcoin is not considered a financial instrument.
Tax treatment of income made from trading in Bitcoins depends on the circumstances of the individual case. Thus it is necessary to determine who receives income and for what kind of income is the case (income from the creation of Bitcoins, buying and selling Bitcoins, payment of other income in Bitcoins).
The profits made by a natural person by selling Bitcoins are exempted from the income tax under the Tax treatment of virtual currency transactions by ZDoh-2 and ZDDPO-2.
On the other hand, profits generated by a physical person in the form of Bitcoins from Bitcoin Mining are taxed as the second income under Article 105 of ZDoh-2.
Belarus has legalized transactions in crypto-currencies, part of a drive to foster private sector growth and attract foreign investment by liberalizing parts of its Soviet-style economy.
President Lukashenko, a former collective farm manager who once called the internet “garbage”, has introduced some reforms to improve the business climate and shore up the economy after recession in 2015 and 2016. President signed the decree, which is designed to attract digital coin entrepreneurs, who are moving businesses to locations more welcoming to crypto-currencies as they face intensifying scrutiny from regulators over digital currency fund-raising, known as initial coin offerings.
The decree legalizes initial coin offerings and transactions in crypto-currencies, including their exchange for traditional currencies on Belarusian exchanges, while all trades will be tax-free for the next five years.
According to Inland Revenue Authority of Singapore, businesses that buy and sell virtual currencies in the ordinary course of their business, will be taxed on the profit derived from trading in the virtual currency. Profits derived by businesses which mine and trade virtual currencies in exchange for money are also subject to tax. There is no specific rule for individuals.
On the other hand, businesses that buy virtual currencies for long-term investment purposes may enjoy a capital gain from the disposal of these virtual currencies. However, as there are no capital gains taxes in Singapore, such gains are not subject to tax.
Whether gains from disposal of virtual currencies are trading or capital gains depends on the facts and circumstances of each case. Factors such as purpose, frequency of transactions, and holding periods are considered when determining if such gains are taxable.
Many countries are still trying to decide whether to tax or not to tax cryptocurrencies. But before they make such a decision, they need to figure out what is the digital currency? Is it an asset? Or is it a currency like EUR or USD?
However, those living in the countries where the profits are made from trading cryptocurrencies and those countries who do not have capital gains taxes should enjoy while it lasts.