With the rapid rise of cryptocurrencies and the explosive growth, the political forces in many countries are reaching out to the emerging industry of cryptocurrency.
On August 7th, the North Carolina state legislators submitted a new tax bill specifically for cryptocurrencies to the House of Representatives, which aimed to “exempt double taxation and record keeping of cryptocurrency transactions.”
Not long ago, the US Internal Revenue Service (IRS) issued a notice saying that it had sent letters to more than 10,000 potential taxpayers holding cryptocurrencies to advice the recipients to pay any delayed taxes or resubmit the modified declaration form of tax payment.
It’s a contest between cryptocurrency holders and the regulatory authorities.
In fact, not only the United States, but also many countries including the United Kingdom, Japan and Australia have already introduced cryptocurrency tax policies. Calling for taxes on cryptocurrency is becoming a focus of regulatory authorities now or in the future.
In the war of interest distribution, some people have earned a lot of money while some have earned profits but become the target of tax department due to ignorance.
Remember to Pay Tax for Cryptocurrency Transaction
Recently, the Reddit user named “U/q928hoawfhu” received a letter in which he was informed by the US Internal Revenue Service (IRS) that he might not have correctly filled in the cryptocurrency-related transaction information.
We have information that you have or had one or more accounts containing virtual currency but may not have properly reported your transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies.
At the beginning of this document, the words “IRS Notice 6174-A” were marked very clearly. He sighed that “Just a heads up to everyone for what’s coming.”
The experience of “U/q928hoawfhu” is not a single case. On July 26, the IRS issued an official announcement stating that it had sent a letter to 10,000 taxpayers about the tax payment of cryptocurrency transactions. These citizens did not pay the tax truthfully, or the transaction information was not reported properly.
It is reported that such educational letters were of three types, namely letter 6173, letter 6174 and letter 6174-A, of which 6174-A received by Reddit user was a “not-so-gentle notice”. The transaction report submitted by the taxpayer may have some mistakes, but if the recipient does not properly report, which will be finally confirmed as a non-compliant taxpayer, then the IRS may take the follow-up actions.
However, the other two types of documents, the letter 6174 is a kind of gentle notice, only to inform the taxpayers that they may not report the information. Once they have paid back the taxes, the IRS will not take any follow-up actions; the letter 6173 is the toughest, which not only demands the taxpayer receiving the documents to respond to their suspected violations, and the IRS will also take follow-up actions to determine if the taxpayer has complied with the regulations.
According to the notice, taxpayers who do not properly report the income tax on cryptocurrency transactions should be responsible for taxes, fines and interest. In some cases, taxpayers may be subject to criminal prosecution.
“Taxpayers should take these letters seriously, review their own tax declarations, correctly modify their previous transaction information and pay back taxes, interest and fines.” Chuck Rettig, the IRS Commissioner, said in one statement. He also added that the corresponding cryptocurrency tax guide would be released soon.
Cryptocurrency has always been an area constantly focused by the IRS criminal investigation department. As early as March 2014, the IRS issued a document (2014-21) to characterize the bitcoin. It determined that bitcoin was a property, like other valuable commodities, but it was not a currency. In addition, “to pay with cryptocurrency or other properties, the same amount of information (as tax return reference) should also be reported.”
Since then, the United States has opened the door to taxation on cryptocurrency transactions and the IRS also started to try to collect taxes on cryptocurrency investors.
Cryptocurrency transactions are not encrypted
As early as 2014, the IRS proposed that “the cryptocurrency transactions need to be reported as a tax return reference”. Since the proposition was not explicit, the taxation on cryptocurrency had not made any progress in the coming years. The users were also puzzled about how to pay taxes and the consequences of tax evasion.
For cryptocurrency investors in the United States, they may know they need to track the information of coin trading as well as report and pay the tax on transaction incomes. However, in fact, the IRS didn’t release specific rules to indicate which methods could be used to calculate the costs of revenues and losses.
However, in the face of the rapidly growing cryptocurrency market and the potentially huge tax revenue, the tax authorities will not stop the pace of exploration.
IRS targets at the exchange first.
In November 2016, the IRS submitted a petition to the court, hoping to obtain the identity and transaction history of the users at the cryptocurrency exchange platform Coinbase. After several rounds of contests, the court agreed on the appeal. In July of the same year, the US Internal Revenue Service announced five compliance activities, including the tax on cryptocurrencies.
In April this year, more than 20 legislators once again urged the IRS to clarify the issue of cryptocurrency. In a letter to the IRS Commissioner, Charles P. Rettig, the legislators pointed out that it might be difficult for the taxpayers to calculate the amount of taxes they should pay, because the IRS didn’t specify the detailed taxation policy on the cryptocurrency, “a lot of ambiguity still exits”.
On May 16, when responding to further requests for cryptocurrency taxes, Charles P. Rettig made it clear that the IRS was drafting the guidance to cryptocurrency taxation.
Based on the response, the guidelines being drafted by the IRS covered three major issues: “acceptable methods for calculation cost basis; acceptable methods of cost basis assignment; and tax treatment of forks”.
Although what the users trade is the cryptocurrency and the information is reported in an autonomous manner, in fact, most transactions are conducted through centralized exchanges, the entire process has not been “encrypted”.
“The names of these taxpayers are obtained through various compliance efforts.” The IRS said in the notice in July. In other words, so long as the IRS firmly controls the lifeline of the exchanges, it will also control all the transactions of the users.
As early as the end of 2017, Coinbase had to meet the requirements of IRS on information sharing. After being requested by the court to disclose information, Coinbase turned over the information of about 13,000 customers (about 0.1% of the total customers) in February, 2018, including the ID, name, date of birth, address and transaction records from 2013 to 2015.
On the other hand, as for the investigation conducted by the IRS, in addition to its own factors, the fear of third-party information and auditing should be the main driving factor for the taxpayers to voluntarily comply with the instructions.
Will the cryptocurrency be levied with taxes?
In November last year, a netizen at Reddit posted that he was a college student living in California. In 2017, when the price of Ethereum was only US$50, he invested US$5,000. In just a few months, the price of Ethereum went up to as many as US$1,200.
According to this market situation, his net profit had been more than US$800,000. According to him, he did not cash in the proceeds into his bank account. According to the IRS, he had to pay taxes on this basis. Later, he learned that the tax amount for him was about US$400,000 in 2017.
But desperately, he participated in some ICOs in 2018. After several rounds of coin collapses, his overall investment income was only US$125,000, which was completely not enough for him to pay the US$400,000 of taxes.
The virtual profits in the past had eventually become a tax nightmare for young investors.
According to the IRS, cryptocurrency holders must record their transaction activities and gains/losses, fill out and submit the Form8949 to the tax authorities. Such acts like evasion of taxes, fines and interests as well as serious understatement may even result in criminal charges.
Interestingly, on July 8 this year, an accountant revealed a 181-page PPT on Twitter, which described how the IRS criminal investigators discovered a variety of potential frauds of cryptocurrency taxes. Then, the IRS confirmed the authenticity of the document.
For this PPT, the accountant explained that the IRS not only focused on the exchanges, but also planned to use interviews, open source searches, electronic monitoring, social media search, etc. to investigate the banks, credit cards and Paypal transaction records, even Facebook, Twitter and other social media, related companies and analyze transaction records to determine whether there is any information on tax evasion.
It’s urgent for users who trade cryptocurrencies to figure out how much tax they need to pay.
At present, some third-party platforms or tools have appeared on the market for specific calculation of cryptocurrency taxes, such as bitcoin.tax, CryptoTrader.Tax, cointracking, CoinsTax, etc.
Becoming a trend
Benjamin Franklin once said, “In this world nothing can be said to be certain, except death and taxes.”
If we look from a global perspective, the countries that levy taxes on cryptocurrencies are not the United States alone.
According to the incomplete statistics issued by EastShore, levying taxes has already become a major financial topic for tax authorities in various countries, including the United States, Japan, the United Kingdom, South Africa, Switzerland and France. They have made or are making tax policies related to cryptocurrencies.
Among all these countries, the cryptocurrency payment in Japan grew very fast. At the very beginning, so long as the users pay with bitcoin, they must pay a consumption tax as high as 8%. When the new consumption tax law came into effective on July 1, 2017, Japan cancelled the bitcoin consumption tax.
However, it didn’t mean the users needn’t to pay taxes. According to Bloomberg News, the capital gains from bitcoin transactions were regarded as a kind of “miscellaneous income” in 2017, and the National Tax Agency of Japan claimed that cryptocurrency investors should declare their own cryptocurrency trading profits when submitting the annual tax return between February 16 and March 15 in 2018.
For this part of the profit, people need to pay a tax ranging from 15% to 55%. The highest rate is applicable to cryptocurrency investors with annual income of more than 40 million yen.
According to the guidelines previously released in the UK, the encrypted assets are considered as personal investments and are subject to capital taxes. If the proceeds are obtained from mining and airdrop activities, people should pay taxes in accordance with current laws on income tax and national insurance payments.
Of course, some countries charge a high percentage of tax on cryptocurrency transactions, while other countries are just tolerant of cryptocurrency transactions.
It is reported that some countries, such as Singapore, Malaysia, Portugal and Belarus, have adopted a certain degree of tax exemption for cryptocurrency transactions.
Take Belarus as an example, most of the profits related to cryptocurrency (including trade and mining) are tax-free before 2023, so the policy is very loose there.
In fact, the official attitudes to cryptocurrencies are quite contradictory in various countries.
On the one hand, the rapid rise of cryptocurrencies has forced regulatory authorities to pull cryptocurrencies to a legal and compliant track. On the other hand, the increasingly distinct differences between cryptocurrencies and traditional financial products have constantly reminded them that only new regulations can realize better supervision and management.
Once the government has fully controlled the situation of all the cryptocurrencies, how long will the potential high profits space for cryptocurrency last?