Every country has a different set of tax rules and regulations and though people in America, Britain or France might hold, for example, the same amount of Bitcoin, they would have very different experiences of value. The idea about cryptocurrency taxation is neither stable nor simple because, in theory, Bitcoin is equivalent to any other Bitcoin no matter what country you live in, irrespective of when a cryptocurrency is mined. All instances of the same cryptocurrency have the same value. This begs the question, what is the future of crypto taxation?
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In theory, this sounds amazing but the reality is the purchasing power parity often differs from country to country based on supply and demand, especially if you’re buying goods with that digital asset. Additionally, the government may deem a certain amount of those assets tainted if it was transferred through suspect or flagged accounts. And then there is the issue of tax. If you have money, or in this case, digital assets, the governments will do what they can to keep their hand in your pocket.
The French government recently announced that it would only tax cryptocurrency involved in crypto-to-fiat transactions. Portugal doesn’t tax crypto at all — the newly promulgated rules are far less onerous than those in place in many countries, including the United States. In the United States, the situation is more complex than that where the House of Representatives has introduced various “Safe Harbor” and “Virtual Value” rules – none have yet made it through legislative gridlock and into the nation’s law books.
At present, most tax professionals interpret the Internal Revenue Service’s Notice 2014-21 such that any cryptocurrency transaction, including crypto-to-crypto swaps, incurs a tax liability. This makes it nearly impossible for a layman to handle his own cryptocurrency taxes. To adhere to the IRS standards, they must keep track of the exact value of every portion of their holdings at the moment they acquired it, and whenever they exchanged any portion of it for another cryptocurrency or fiat. The complexity of the accounting required alone would make cryptocurrency far less appealing than it might otherwise be, but the effects of volatility causes even more problems. Because each transaction must be taxed, it’s altogether possible that a taxpayer would pay high rates on an ill-timed crypto-to-crypto trade, then watch as the crypto’s value plummets. The loss in addition to these proposed taxes is simply aggravating and quite complicated.
A good tax scheme is the one where taxpayers enjoy benefits. Crypto-to-crypto taxation imposes a cost on a virtual benefit that may result in a real-world loss. The labor burden that crypto-to-crypto taxation incurs is immense and it forces small-time holders to invest in accounting services if they don’t want to flout the law. In the future, countries like the UK and the US may work on tax rules that do not penalize cryptocurrency holders.
Though Bitcoin is more than a decade old, cryptocurrency remains a young technology, and we are aware of the fact that it takes at least a decade for governments to adequately respond to innovations. Major changes, however, can inspire regulators and tax authorities to act more quickly.
So what does the future of crypto taxation hold? Though I currently do not foresee any major changes, there will be incremental change and deliberate clarification until taxation is simplified and there is greater coherence to the cryptocurrency accounting. The crypto world hasn’t failed to surprise us and the rules of accounting will evolve to keep pace with innovation.
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