Why it is important to define the taxation of Crypto Assets

Through this article, I want to highlight the importance of countries having an updated guide that defines the taxation of the business transactions of the “token economy”. I am referring to different operations that are carried out with crypto assets, since today there is no uniform tax treatment in different countries.

This task is not easy due to the absence of centralized control over cryptographic assets, pseudo-anonymity, difficulties related to obtaining information on operations and also valuation difficulties.

Likewise, there are difficulties in classifying them as a financial instrument or an intangible asset due to their hybrid features and of course the rapid and constant development of the underlying technology (blockchain).

CURRENT GOOD PRACTICES

It is worth highlighting that many countries already have a guide that allows them to define the tax treatment of different operations with crypto assets. To cite some examples, the Australian Taxation office has a guide on how to treat investments in crypto assets for tax purposes in Australia.

The guide deals with topics such as:

•  What are crypto assets?
•  Transactions – acquiring and disposing of crypto assets; 
• How to work out and report capital gains tax (CGT) on transactions involving crypto assets; 
• How to treat a new crypto asset you receive as a result of a chain split.
• Work out if your crypto asset is a personal use asset and when a personal use crypto asset is exempt from Capital Gains Tax. 
• Capital gains tax (CGT) treatment of decentralized finance (DeFi) and wrapping crypto tokens.
• Which records you need to keep for crypto assets and crypto transactions and how long to keep them. 
• A glossary of terms common in crypto.

The United States IRS also has a very detailed guide on the subject. It deals with the following topics: 

• What's a digital asset?
• Examples of digital assets (Convertible virtual currency and cryptocurrency, Stablecoins, Non-Fungible Tokens (NFTs);
• How a digital asset is used;
•  How to answer the digital asset question on tax return; 
• How to report digital asset income, keep records, FAQs on virtual currency transactions,

In the United Kingdom, there is also a very detailed guide about income or gains from crypto assets. In addition, HMRC published a very detailed Manual on cryptographic operations, the HMRC internal manual which deals with different topics: Since 2008, the crypto asset industry has seen a dramatic expansion of asset types, technology, and scale. Due to the evolving nature of the underlying technology and the increase in use of crypto-assets, the Canada Revenue Agency (CRA) will continue to update its tax guidance as needed.P.S: The webpage provides general tax information for the most common tax issues related to crypto-assets. You will also find links to more technical content provided by the CRA.

‍FINAL IDEAS

‍It is vital that each country has clear guidance and an applicable legislative framework, which provides guidance on how crypto assets fit into the existing tax framework. That is, a guide that is comprehensive and addresses the main taxable events and forms of income associated with them. As long as these guidelines do not exist, uncertainty will continue for all parties.

For tax authorities, it is vital to have information on the operations carried out on the one hand, but on the other, it is also vital to correctly define crypto taxation. If crypto taxation is not defined correctly, it will happen that many of the tax audits will reach the judicial courts of the countries to try to define their correct taxation. For taxpayers, it is important to specify the taxation so that they’re able to carry out their operations with crypto assets and know what the applicable taxes will be. It is also important that uncertainty is eradicated because it might increase one’s tax compliance costs. Since a country, having different crypto tax treatments, may require different reports and cases of double or multiple taxation may occur.

The good practices that we discussed from jurisdictions or countries that have already made progress on the issue deserve to be highlighted, providing certainty to all parties involved so that they serve as a guide for those jurisdictions that are still analyzing the issue. Countries that have not yet published their guides may use those already existing in other countries such as those mentioned, without prejudice to adapting them to their current legislation. Obviously, there are multiple crypto operations and they vary daily. The existing tax definitions may be applied to many of them.

In other jurisdictions, it will require an additional effort to know the true legal nature of the operations. For this, the state needs to collaborate with the various actors in the private sector. I believe that a regulatory framework is key to defining taxation. In this sense, the FATF is promoting regulations that have a standard definition of virtual assets and virtual asset service providers. Countries need to understand the money laundering and terrorist financing risks the sector faces; license or register virtual asset service providers and supervise the sector, in the same way they supervise other financial institutions.

Virtual Assets Service Providers (VASPs) need to implement the same preventive measures as financial institutions, including customer due diligence, record keeping, reporting of suspicious transactions and obtaining, holding and securing transfer originator and beneficiary information when making transfers. In August 2022, the OECD approved the Crypto-Asset Reporting Framework (CARF) which provides for the reporting of tax information on transactions in crypto assets in a standardized manner, with a view to automatically exchanging such information. The CARF defines the relevant crypto assets in scope and the intermediaries and other service providers that will be subject to reporting. In doing so, the CARF incorporates recent developments in the global anti-money laundering standards of the Financial Action Task Force.

In conclusion, I believe the use of the same terminology from both the FATF and the OECD will be extremely useful for countries to define a uniform tax framework regarding the taxation of operations with crypto assets.