Taxes

The U.S. Internal Revenue Service (IRS) has cleared up some confusion about how cryptocurrency transactions are taxed, particularly regarding like-kind exchanges and promotional airdrops. As the tax agency intensifies its enforcement efforts, more people are seeking the best tax software to help them.

Also read: Tax Guide: What Crypto Owners Should Know

Pre-2018 Like-Kind Exchanges

The latest IRS cryptocurrency tax guidance has raised a number of questions. Besides issues surrounding hard forks and airdrops, Bloomberg reported that tax practitioners had questions regarding how cryptocurrency transactions made before 2018 are taxed. This was due to the tax overhaul in December 2017 which enables taxpayers to postpone paying tax on the gain of a sale if the proceeds are reinvested in similar property.

Suzanne Sinno is an attorney in the IRS Office of Associate Chief Counsel (Income Tax and Accounting) who worked on the new crypto guidance. She explained at the American Institute of CPAs conference in Washington, D.C., on Wednesday that taxes on like-kind exchanges of cryptocurrency cannot be deferred, even for transactions that occurred before 2018. She clarified:

It is the agency’s position that like-kind exchange principles were never applicable to cryptocurrency.

The confusion concerns Section 1031 like-kind exchanges, which beginning Dec. 31, 2017, “applies only to exchanges of real property held for use in a trade or business or for investment, other than real property held primarily for sale,” the IRS website explains. “Before the law change, section 1031 also applied to certain exchanges of personal or intangible property.”

Promotional Airdrops

Another ambiguous area emerging from the new IRS crypto tax guidance is promotional airdrops where companies give away free coins for marketing purposes. Christopher Wrobel, another attorney in the IRS Office of Associate Chief Counsel (Income Tax and Accounting), confirmed that the revenue ruling does not apply to promotional airdrops, Bloomberg conveyed. He elaborated:

The IRS hasn’t yet decided whether such promotional airdrops should be treated as taxable.

The tax agency issued the latest cryptocurrency tax guidance in October to supplement its previous guidelines published in 2014. The new guidance states that “When you receive cryptocurrency from an airdrop following a hard fork, you will have ordinary income equal to the fair market value of the new cryptocurrency when it is received … provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency.”

Growing Demand for Good Tax Software

The IRS has been ramping up tax enforcement efforts in the crypto space. For example, the agency sent out over 10,000 letters to crypto owners in July reminding them of their tax obligations. Claiming to have new tools at its disposal, the IRS is also collaborating with other countries’ tax authorities to identity crypto tax evaders. The agency’s tax collection efforts have led to increasing demand for good software programs that can help keep track of cryptocurrency transactions, calculate tax liabilities, file returns, and claim deductions. News.Bitcoin.com recently provided a list of useful tax tools for crypto owners.

Several tax preparation platforms reported increased numbers of visitors in the days following the IRS guidance and enforcement announcements. Beartax CEO Vamshi Vangapally revealed that traffic to his platform more than quadrupled to 1,300 visitors. Tokentax cofounder Zac McClure saw a similar spike, noting that the news got people interested even for those who were not contacted by the IRS.

Lawyer Katya Fisher said a growing number of her clients are using or looking for software to help them meet their crypto tax obligations. “We’re seeing significant growth because the market is demanding it,” she was quoted as saying. “One of the biggest complaints I get from crypto traders is, ‘I have all these trades with different cryptocurrencies — how am I supposed to keep track of it?’”

Crypto tracking and reporting platform Cointracking is also seeing higher traffic. The site’s monthly registrations total 10,500 users on average, 27.3% of whom are in the U.S., CEO Dario Kachel detailed, adding that the average monthly page views top 2.4 million, with the U.S. representing 29.1%. However, between July 26 and Aug. 25, registrations nearly tripled to 29,700 users and almost 50% of them are U.S.-based. The site’s page views also jumped to 7 million during that time, with 42.2% coming from the U.S.

What do you think of how the IRS taxes crypto transactions? Let us know in the comments section below.

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Cryptocurrency holders have long wrestled with their tax obligations. These fiduciary duties have been complicated by tax agencies, which are several steps behind technology and now playing crypto catch-up. Updated guidelines from the U.S. and U.K.’s tax agencies were finally released this year, but the initial relief felt by conscientious bitcoiners was to prove short-lived, for on closer examination, the documentation has left many crypto questions unanswered.

Also read: Crypto-Friendly Silvergate Bank IPO Debuts on NYSE

It’s 2019 and Tax Is Still Taxing

The lack of uniformity regarding tax on crypto earnings, with some national governments happy to kick the can down the road and others determined to immediately collect their pound of flesh is frustrating, to put it mildly. The latest guidelines from Her Majesty’s Revenue and Customs (HMRC) for U.K. residents has succeeded in muddying the already-feculent waters.

Once again, a tax authority’s attempt to provide clarity on crypto taxation has become, instead, a wellspring of uncertain questions. It was the same when the IRS published crypto tax guidance in 2014, and again in October of this year. So, why are such powerful arms of the state unable to lay down clearly-defined tax principles on virtual currency? Is it because the powers-that-be do not fully comprehend this rapidly-evolving environment or its underlying technology? Or is it the case that the nature of forks, airdrops and token sales is incompatible with hard-and-fast taxation rules?

Robin Singh is the founder of crypto tax platform Koinly. “Part of the problem,” he explains, “is that regulators do not understand cryptocurrencies. In the latest IRS guidelines, for example, the IRS refers to forked coins as “airdrops after a fork”. They are oblivious to the fact that there is no actual airdrop – the ledger is simply copied. This misinterpretation has given rise to the issue investors now face: paying income tax on forked coins they may have no intentions of using.”

Exchange Tokens ‘Aren’t Currency’

HMRC’s recent update to its guidance on crypto taxes, published on November 1, dealt with crypto transactions carried out by companies, businesses such as partnerships and sole traders, and individuals. In essence, it sought to end confusion about the extent to which cryptocurrency transactions occasion capital gains tax, national insurance contributions, corporation tax, VAT, and income tax.

The main plank of HMRC’s argument is that, generally speaking, “exchange tokens” are not currencies, stock or marketable securities – meaning they are exempt from stamp taxes. Nevertheless, tokens used in debt transactions do incur stamp taxes.

Bitcoin is explicitly mentioned in the policy paper as an example of an exchange token, with security and utility tokens to be dealt with in a future update. Despite the policy paper being entitled “Tax on cryptoassets,” therefore, it is far from comprehensive. And, to quote an instructive line, “The tax policy may evolve as the sector develops.”

Crypto Tax Obligations for Individuals

As it has previously, HMRC was keen to point out that “the tax treatment of all types of tokens is dependent on the nature and use of the token and not the definition of the token.” In other words, it’s up to you whether you incur any tax at all.

If you sell exchange tokens that have appreciated in value, they will – as investments – be liable to capital gains tax; income tax and national insurance contributions are also due on crypto assets received from employers as a form of non-cash payment and from mining operations or airdrops.

In instances where individuals essentially act as a business by frequently transacting financial trades involving crypto assets, their taxable trading profits are subject to income tax rather than capital gains tax. Of course, you can reduce your tax liability by offsetting losses against future profits; the cost of the asset itself can be a deduction.

A Thankless Task for Tax Agencies

Because assets such as bitcoin are traded on exchanges which do not use pounds sterling, HMRC’s guidance notes that the value of any gain or loss must be converted to sterling on an individual’s self assessment tax return. The guidance points out that individuals must keep separate records of each crypto asset transaction including type of asset; date of transaction; if they were bought or sold; number of units and value of transaction in sterling; cumulative total of the investment units held; and bank statements and wallet addresses.

Of course, it is easy to pick holes in the guidance. The tax body says that reasonable care should be taken to make “appropriate valuations” for transactions using a consistent methodology. However, it fails to elaborate on what would be appropriate, and which methodology would be permissible. The HMRC also betrays its own ignorance when discussing matters of fraud in the cryptosphere, noting that theft is not considered disposal “as the individual still owns the assets and has a right to recover them.” They may have a right to recover them, but they probably have no prospect of doing so. Victims of theft cannot claim a loss in capital gains tax either.

Crypto Tax Obligations for Businesses

HMRC’s guidance for businesses is, as you might expect, even more complex and confusing than for individuals. Crypto mining companies are subject to tax based on factors including degree and frequency of activity, level of organization, risk and commerciality. But most business activities in the cryptosphere are subject to some form of tax, whether the activity is buying and selling tokens, exchanging tokens for other assets (including other forms of cryptocurrency) and supplying goods and services in return for tokens, the latter of which entails VAT on the “pound sterling value of the exchange tokens at the point the transaction takes place.”

Confusion stems from qualifiers such as “the type of tax will depend on who is involved in the business,” although the process by which accounts should be prepared is, at least, unambiguous: they should follow generally accepted accounting practice (GAAP) or, if relevant, international accounting standards (IAS).

If a business’s activities constitute a trade, receipts and expenses form part of the calculation of the resulting profit. If a partnership conducts the trade, partners will be taxed on their share of the trading profit. And if the activity concerning the exchange token is not deemed “trading activity,” the gain obtained from eventually disposing of a crypto asset will be charged to corporation tax.

Where Do We Go From Here?

The fact that the status of security and utility tokens remains unaddressed indicates that HMRC is continuing to wrestle with fundamental questions about tax on crypto. While these latest directives do answer some long-held queries pertaining to “exchange tokens,” they also throw up others. Is HMRC open to eventually changing their stance that cryptocurrency is not money, for instance? This one will be asked ad infinitum, particularly as merchant adoption increases. For bitcoiners in the U.K., U.S., and other leading crypto countries, divining the intent of the tax agencies has become a dark art.

Do you think tax agencies are at fault for complicating crypto tax guidance, or are they just struggling to keep pace with a rapidly evolving industry? Let us know in the comments section below.

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Her Majesty’s Revenue and Customs (HMRC) has updated its guidelines on the taxation of transactions involving crypto assets. The United Kingdom’s tax authority clarifies its stance on cryptocurrencies and explains which taxes apply to specific activities carried out by business entities and private individuals.

Also read: Bad Loans at Big British Banks Jump Over 50% in a Year

Taxable Activities Listed

Multiple tax tools now exist to help crypto users and businesses from the industry with tax reporting. But in a field as fluid as the crypto space, regulations change rapidly. On Nov. 1, HMRC published updated policy papers concerning crypto transactions undertaken by companies, other businesses such as sole traders and partnerships, and individuals.

The agency notes that the documents deal with the tax treatment of “exchange tokens,” explicitly mentioning bitcoin. They do not apply to tokens issued in initial coin offerings (ICOs). The taxation of security and utility tokens will be addressed separately in the future. Taking into account the specifics of the fast-changing industry, HMRC says it will look at each case and apply the relevant provisions.

The tax office has listed a number of crypto-related activities that give rise to tax obligations. These include buying, selling and exchanging tokens for other assets, including cryptocurrencies. Crypto mining has been mentioned as a taxable economic activity. Businesses providing goods or services in return for digital coins also owe taxes to the British government.

The guidelines review the applicable taxes as well and corporate entities conducting any of the aforementioned activities are likely to be liable to pay one or more of the following taxes: capital gains tax, corporation tax, income tax, value added tax (VAT), and stamp taxes. National Insurance contributions are also due.

Private individuals will be liable to pay capital gains tax when they sell crypto assets that have been acquired as a personal investment, or income tax and National Insurance contributions on coins they receive from employers, mining or airdrops. Traders may reduce their income tax liability by offsetting losses against future profits. The amount paid for an asset is considered a cost that can be allowed as a deduction. The loss of a private key, however, does not count as a disposal of the assets for capital gains tax purposes. Victims of theft cannot claim a loss either.

Cryptocurrency Not Money

HMRC addresses other important aspects of taxation concerning crypto-related transactions. The authority emphasizes that taxable profits, and losses respectively, should be calculated and reported in British pounds on tax returns filed by companies and individuals. In case a transaction does not involve GBP, an “appropriate exchange rate” must be established in order to convert the transaction to fiat.

The agency does not explain clearly what it would consider an ‘appropriate’ valuation but stresses that a “consistent methodology” should be used. The papers further emphasize that profits from a crypto trade must be calculated in accordance with either the U.K. generally accepted accounting practice (UK GAAP) or in accordance with international accounting standards (IAS).

The requirement to keep records in fiat equivalent has to do with the tax department’s current stance on decentralized cryptocurrencies. “It is important to note that HMRC does not consider any of the current types of cryptoassets to be money or currency. This means that any Corporation Tax legislation which relates solely to money or currency does not apply to exchange tokens or other types of cryptoasset,” the administration points out.

However, the tax regulator remarks that “if an employer ‘pays’ exchange tokens as earnings to an employee, those exchange tokens count as ‘money’s worth’.” In other words, crypto salaries paid in the United Kingdom are subject to income tax and National Insurance contributions on the fiat value of the cryptocurrency used for remuneration.

What’s your opinion about the updated guidelines regarding crypto taxation in the U.K.? Tell us what you think in the comments section below.

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