The tax treatment of cryptocurrencies
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The tax treatment of cryptocurrencies
Sangwha Shin
Korea Institute of Public Finance
Feb 22, 2019
Sangwha Shin (KIPF) Feb 22, 2019 1 / 45Outline
1 Motivation
2 The evolution of cryptocurrencies
3 The tax treatment of cryptocurrencies in major countries
4 The tax treatment of cryptocurrencies in South Korea
5 Conclusion
Sangwha Shin (KIPF) Feb 22, 2019 2 / 45Outline
1 Motivation
2 The evolution of cryptocurrencies
3 The tax treatment of cryptocurrencies in major countries
4 The tax treatment of cryptocurrencies in South Korea
5 Conclusion
Sangwha Shin (KIPF) Feb 22, 2019 3 / 45Motivation
Why not apply the existing tax treatment to cryptocurrencies?
Similar underlying technology, various applications
cryptocurrencies, utility tokens, tokenized platform, etc
medium of exchange vs. asset
access rights to services, asset, or programs
Sangwha Shin (KIPF) Feb 22, 2019 4 / 45Motivation
Why not apply the existing tax treatment to cryptocurrencies?
Similar underlying technology, various applications
cryptocurrencies, utility tokens, tokenized platform, etc
medium of exchange vs. asset
access rights to services, asset, or programs
Anonymity
borderless, instant movement of cryptocurrencies
difficult to enforce tax rules
Sangwha Shin (KIPF) Feb 22, 2019 4 / 45Outline
1 Motivation
2 The evolution of cryptocurrencies
3 The tax treatment of cryptocurrencies in major countries
4 The tax treatment of cryptocurrencies in South Korea
5 Conclusion
Sangwha Shin (KIPF) Feb 22, 2019 5 / 45Types of Cryptocurrencies
Source: www.untitled-inc.com
Sangwha Shin (KIPF) Feb 22, 2019 6 / 45Types of Cryptocurrencies
Medium of exchange
Acts as a store of value and medium of exchange
Bitcoin, Zcash, Litecoin
Tokenization
Gives rights to other assets, legal tendar, service, platform
USDT, GOLD (assets or legal tendar)
ETH, STEEM (platform, service)
DGO, LKK (share-like)
Sangwha Shin (KIPF) Feb 22, 2019 7 / 45The evolution of Cryptocurrencies
Bitcoin
aimed to be a medium of exchange without middlemen
1st generation of Altcoins
try to improve functionalities of Bitcoin
Similar to asset-backed securities
Stablecoins: pegged to asset or fiat currencies
securitization of service, asset or networks
Sangwha Shin (KIPF) Feb 22, 2019 8 / 45Implications
Difficult to define the legal status of cryptocurrencies
Cryptocurrencies are diverging
Better to focus on how it is used
The anonymous aspect of cryptocurrencies can be a threat
The tax administration requires enough information of economic
activities realated to cryptocurrencies
Sangwha Shin (KIPF) Feb 22, 2019 9 / 45Outline
1 Motivation
2 The evolution of cryptocurrencies
3 The tax treatment of cryptocurrencies in major countries
4 The tax treatment of cryptocurrencies in South Korea
5 Conclusion
Sangwha Shin (KIPF) Feb 22, 2019 10 / 45U.S. - Tax treatment
The taxation rules on ”virtual currencies” of U.S. is summarized in
the notice of IRS 2014 (Notice 2014-21)
applied only to the convertible virtual currencies.(For others, no rules
yet)
Other cryptocurrencies, like utility tokens or securitization tokens, are
not applicable to this notice.
treated as ”asset” for federal tax purposes
Sangwha Shin (KIPF) Feb 22, 2019 11 / 45U.S. - Tax treatment Recieved virtual currency in return for goods or service → fair market value should be included in computing gross income mined virtual currency → fair market value of the day it is mined should be included in computing gross income Business mining → self-employment income Sale or exchange → capital gain (capital asset) / ordinary gains (inventory) Sangwha Shin (KIPF) Feb 22, 2019 12 / 45
U.S. - Regulations
Financial Crimes Enforcement Network(FinCEN) 2013
Scope: Virtual currencies works as a medium of exchange
exchanger: a person engaged as a business in the exchange of virtual
currency for real currency, funds, or other virtual currency
administrator: a person engaged as a business in issuing a virtual
currency, and who has the authority to redeem
user: a person that obtains virtual currency to purchase goods or
services
Sangwha Shin (KIPF) Feb 22, 2019 13 / 45U.S. - FinCEN 2013
An administrator or exchanger is an Money Services Businesses
(MSB), specifically, a money trasmitter
subject to MSB registration
report suspicious transactions
keep records
Sangwha Shin (KIPF) Feb 22, 2019 14 / 45U.S. - Treasury Inspector General for Tax Administration
Three recommendations to the IRS
develop a coordinated virtual currency strategy in the IRS
provide updated guidance to reflect the necessary documentation
requirements and tax treatments needed for the various uses of virtual
currencies
revise third-party information reporting documents to identify the
amounts of virtual currencies used in taxable transactions
Sangwha Shin (KIPF) Feb 22, 2019 15 / 45U.S. - Tax administration of IRS
IRS collects user information of virtual currency transactions from
exchanges
send out reminders
compliance campaigns
IRS uses a John Doe summons to exchanges
request information about U.S. taxpayers who conducted transactions
in a virtual currency from 2013 to 2015
U.S. taxpayers with more than 20,000 USD account
ID, name, date of birth, address, transaction history, etc
Sangwha Shin (KIPF) Feb 22, 2019 16 / 45Japan - Income tax
Incomes generated from cryptocurrencies are classified as business
income or miscellaneous income
exchanges, acquired in business transactions −→ business income
personal purpose −→ miscellaneous income
Both are under comprehensive tax rate, 5-45%
Mining income, new coins from the fork
Sangwha Shin (KIPF) Feb 22, 2019 17 / 45Japan - Consumption tax
From 2014 to 2017, cryptocurrencies are under the consumption tax
treated as commodities
From July 2017, cryptocurrencies are exempt from the 8%
consumption tax
Sangwha Shin (KIPF) Feb 22, 2019 18 / 45Japan -Other issues On going discussion on lowering the income tax rate (5-45% → 10%) and allowing the deduction carried forward for losses More detailed method of evaluation will be included in the tax law revision in 2019 Sangwha Shin (KIPF) Feb 22, 2019 19 / 45
Japan - Regulations
Exchanges are required to register to the Financial Services Agency
Obligations of exchanges
System risk management
User information management
Transaction keeping obligation
suspicious transaction reporting
The self-regulatory status of the cryptocurrency industry (2018.10.)
permit the Japan Virtual Currency Exchange Association to police and
sanction exchanges for any violations
Sangwha Shin (KIPF) Feb 22, 2019 20 / 45Japan - Tax administration
NTA recomment the exchanges to issue the annual report to
customers for transactions after 2018.1.1.
This annual report will be issued in electronic form, which can be
directly used for a software program provided by the National Tax
Agency
Exchanges also issue the ”certificate of balance” for ”inheritance tax
report” purposes
Sangwha Shin (KIPF) Feb 22, 2019 21 / 45Japan - Tax administration From 2019, high-income and asset taxpayers should report the blances of cryptocurrencies by type, usage, maket prices The National Tax Agency can acquire the personal information of users from exchanges Sangwha Shin (KIPF) Feb 22, 2019 22 / 45
Canada - Income tax
Canada Revenue Agency(CRA) treat cryptocurrencies as commodity
in income tax act (2013)
using cryptocurrencies to purchase goods or services would be treated
as a form of barter transaction
Income related to business → ordinary income, 15-33%
comprehensive tax
Income not related to business → capital gain, only 50% of capital
gain will be under 15-33% comprehensive tax rate
Sangwha Shin (KIPF) Feb 22, 2019 23 / 45Canada - GST
Cannot find the official tax guidelines for GST
Generally, financial services are exempt from GST. But,
cryptocurrencies are treated as commodity.
Sangwha Shin (KIPF) Feb 22, 2019 24 / 45Canada - Regulations
Gazette, Part I, Volume 152, Number 23
implement a full compliance program and register with Financial
Transactions and Reports Analysis Centre of Canada (FINTRAC)
record-keeping and reporting obligations
in the case of a transaction of $1,000 or more, the name, address and
telephone number of the person or entity that requests the exchange,
the nature of their principal business or their occupation and, in the
case of a person, their date of birth;
Sangwha Shin (KIPF) Feb 22, 2019 25 / 45Canada - Regulations
Three recommendations from House of commons (Standing
Committee on Finance / 2018.11.)
1) crypto-exchanges as money service businesses (MSB)
2) regulation on crypto-wallets; proper identification is required, true
ownership of wallets is known to the exchanges
3) establish a license for crypto-exchanges / anti-money laundering
program (the State of New York’s program as a model for best
practices)
Sangwha Shin (KIPF) Feb 22, 2019 26 / 45Canada - Tax administration The CRA can request information from cryptocurrency related organizations with a court order Taxpayers are required to report the CRA if they own specified foreign property (including cryptocurrencies) that in the aggregate cost more than $100,000 Sangwha Shin (KIPF) Feb 22, 2019 27 / 45
German - Income tax If the mining is an occasional activity → miscellaneous income If cryptocurrencies are acquired or produced as part of profit-making commercial activity → business income The exchange of cryptocurrencies into euros or another cryptocurrency → it leads to private sale, taxable transaction Sangwha Shin (KIPF) Feb 22, 2019 28 / 45
German - VAT
The judgment of the European Court of Justice(ECJ) in 2015
The exchange of conventional currencies into the virtual currency and
vice versa falls under the exemption in VAT Directive
If the cryptocurrencies will be exchanged for traditional currencies, the
transactions constitute the supply of services
However, those are treated as transactions under the provision of
”currency, bank notes and coins used as legal tender”, which is exempt
from VAT
Sangwha Shin (KIPF) Feb 22, 2019 29 / 45German - Regulations
BaFin classifies Cryptocurrencies as one type of financial product,
”units of account”
Business related to cryptocurrencies are required to get authorisation
from BaFin
New tokens in the ICO may not be classified as units of account.
Tokens can be security, share, or capital investment. Case by case.
Sangwha Shin (KIPF) Feb 22, 2019 30 / 45German - Regulations
Gemany follows 5th anti-money laundering directive in 2018, which
includes new rules related to cryptocurrencies.
EU countries need to revise their law system accordingly by 2020
Providers engaged in exchange between cryptocurrencies and fiat
currencies, custodian wallet providers are added as the obliged entities
Restrict anonymity: exchanges, wallet providers should be registered
Financial Intelligence Units(FIUs) should be able to obtain information
to associate cryptocurrencies addresses to the identity of the owner of
cryptocurrencies to combat the risks related to the anonymity
Sangwha Shin (KIPF) Feb 22, 2019 31 / 45Australia - Income tax
Guidance from Australian Taxation Office (ATO) in 2014; more
detailed guideline in 2018
Cryptocurrencies are considered as property for tax purposes
Businesses related to exchange, sale, and mining of cryptocurrencies →
ordinary income
Gains from disposing cryptocurrencies for personal uses → capital gain,
comprehensive tax
less than AUD 10,000 will be disregarded
Sangwha Shin (KIPF) Feb 22, 2019 32 / 45Australia - GST
Cryptocurrencies are not subject to GST form 1 July 2017
Cryptocurrencies are treated the same way as physical money for GST
purpose
Prior to 1 July 2017, consumers who use cryptocurrencies can bear
GST twice : Once on the purchase of the cryptocurrencies and once
again on its use in exchange for other goods and services subject to the
GST
Sangwha Shin (KIPF) Feb 22, 2019 33 / 45Australia - Regulations
On 3 April 2018, Australian Transaction Reports and Analysis
Centre(AUSTRAC) commenced regulation of cryptocurrency
exchanges
All cryptocurrency exchanges must be registered with AUSTRAC
identify and verify the identities of customers
report suspicious transactions involving physical currency that exceed
AUD 10,000 or more
Sangwha Shin (KIPF) Feb 22, 2019 34 / 45Australia - Tax administration
The ATO is entitled to access to AUSTRAC information
The ATO announced that they will use 100-point identification
checks and data-matching technologies
100-point identification: more detailed checks on identities
data-matching: matches the ATO’s information with other data
Sangwha Shin (KIPF) Feb 22, 2019 35 / 45Summary
Table: Summary - tax treatment
Income Tax VAT
Country
classification tax rule classification tax rule
U.S property business income / capital gain - -
Japan commodity business income / miscellaneous income means of payment exemption
Canada commodity business income / capital gain unknown unknown
German private capital asset business income / capital gain means of payment exemption
Australia property business income / capital gain currency exemption
Sangwha Shin (KIPF) Feb 22, 2019 36 / 45Summary
Table: Summary - Regulations
Country report obligation of taxpayer anti-money lanundering on exchanges
U.S yes (asset) yes
Japan yes (2020 ) yes
Canada yes (100,000 CAD ) yes
German - yes
Australia - yes
Sangwha Shin (KIPF) Feb 22, 2019 37 / 45Outline
1 Motivation
2 The evolution of cryptocurrencies
3 The tax treatment of cryptocurrencies in major countries
4 The tax treatment of cryptocurrencies in South Korea
5 Conclusion
Sangwha Shin (KIPF) Feb 22, 2019 38 / 45Legal status
There is no agreed legal status of cryptocurrencies.
Currency: The Korean government made it clear that cryptocurrencies
are not a legal tender
Financial product: Only securities and derivatives are belongs to the
financial product in the current law
Asset: The economic value of Bitcoin has been recognized by the court
(Intangible property).
Sangwha Shin (KIPF) Feb 22, 2019 39 / 45Studies on tax treatment of cryptocurrencies
There is no official statement from the government.
Many studies on this topic. Most of them focus on tax on capital gain
and ‘value-added tax.
No disagreement on using the existing tax rules of the corporate
income, inheritance, and gift
Sangwha Shin (KIPF) Feb 22, 2019 40 / 45Capital gain tax
The current capital gain tax rules lists types of incomes
Some studies argue that the income from buying/selling
cryptocurrencies are not taxable as it is not on the list
The revision of tax law in this regard is expected in many studies
Sangwha Shin (KIPF) Feb 22, 2019 41 / 45Value added tax Some studies interpreted the cryptocurrencies as intangible asset, which is under the VAT On going debates, but currently there is no VAT on purchasing/selling cryptocurrencies Sangwha Shin (KIPF) Feb 22, 2019 42 / 45
Other regulations
The anti-money laundering regulations on the financial institutions
Enhanced checks on identities
Obligations to report suspicious transactions
The anti-money laundering regulations are not directly on the
business related to the cryptocurrencies
ICO is forbidden / No margin trading in exchanges
Sangwha Shin (KIPF) Feb 22, 2019 43 / 45Outline
1 Motivation
2 The evolution of cryptocurrencies
3 The tax treatment of cryptocurrencies in major countries
4 The tax treatment of cryptocurrencies in South Korea
5 Conclusion
Sangwha Shin (KIPF) Feb 22, 2019 44 / 45Summary
The tax rules of the major countries are similar to each other
provide guidelines to the cryptocurrencies that can be used as a
medium of exchange
existing tax rules can be applied to the asset-like cryptocurrencies
Stablecoins should be reviewed to apply the existing tax rules
(case-by-case)
Needs regulations to control for the anonymity
regulations on the crypto-exchanges are required
regulations on wallet-providers
The international cooperation is very important to deal with fully
anonymous cryptocurrencies
Sangwha Shin (KIPF) Feb 22, 2019 45 / 45You can also read
