Taxation of Cryptocurrencies: A Comparative Analysis

Written by León Lanis V., Paralegal

Taxing cryptocurrencies has been a huge challenge for international tax law, whether because there’s inconsistencies of tax agencies within a country or by different approaches between one country and another. In the present article, we’ll highlight the different challenges of cryptocurrencies taxation and show the approaches of some countries.

The first challenge to tax cryptocurrencies is settling in its nature. The applications of this technology vary heavily, and there’s no legislation yet to recognise its different implementations. For example, a currency token (such as Bitcoin) and a Security Token Offering (such as SIA), in tax law theory, should have very different treatments, but in practice they are taxed the same way. The second challenge regarding cryptocurrencies and their taxation regards in what moment a revenue service may tax: when it is mined? when an exchange sells/buys crypto? when someone sells after a bull market? As we discuss further on, the answer depends on the legislation.

Before highlighting the approaches some legislations have taken, it is important to discuss the importance of defining crypto currencies.

 

CRYPTO AS A SECURITY?

Crypto as a security has been the primary focus of some agencies, including the Securities Exchange Commission (SEC) of the United States. The definition of a security may vary depending on the legislation, for example, under Chilean law it is defined as “any transferable legal title including shares, stock options, bonds, debentures, mutual fund shares, savings plans, bills of exchange and, in general, any credit or investment instrument.”  Under US law “any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities”. If we accept all crypto assets as securities, all should fall under income tax law whenever the asset or it’s market increases a person’s equity. The adoption of  this definition as a standard for the crypto market has a lot of problems, for every security must be duly registered and kept under tight compliance rules, and we must bear in mind that almost all cryptocurrencies are decentralized by design. In economic terms, by regarding these assets as securities undermines the full spectrum of activities the crypto market may include, such as smart contracts, NFTs, etc.

 

CRYPTO AS A CURRENCY?

In its genesis, Bitcoin and crypto assets were created as a peer-to-peer digital and decentralized cash system. Traditionally a currency is defined as “a foreign exchange medium accepted in international trade”. This definition may suit crypto currencies well, as they seek to become an international trade token for fluid international transactions – however, accepting the definition is risky as well. First, it does not recognize the full spectrum of the cryptomarket. In addition, things like a Security Token or an Initial Coin Offering as a currency have the potential to become safe havens for tax evasion.

Bearing these views in mind, we will now discuss the different approaches some legislations have taken.

 

(I) CHILE

The Internal Revenue Service of Chile (SII) in its internal resolution “oficio 396” specifically states that cryptocurrencies are not subject to VAT as they are not tangible assets, but the increase of equity is considered taxable within the Income Tax Law. Recently, the Chilean president presented to congress the “Fintech Law Bill”, in that bill, Chile aims to pseudo recognize cryptocurrencies as a token for economic trade or a currency, which would not be able to be taxed as income. Neither the SII or the Fintech Law Bill tax activities such as mining, p2p trade or buying cryptocurrencies.

 

(II) AUSTRALIA

The Australian Taxation Office (ATO) has a broad ruling over cryptocurrencies, amending many existing laws.

First, cryptocurrencies are subject to “Capital Gain Tax” or CGT when an individual sells, invests, gifts, trades, converts to fiat currency or obtains tangible goods with it; however, any individual who holds for over 12 months a cryptocurrency may be entitled to CGT discount.

Second, if cryptocurrencies are used for carrying business, such as an Initial Coin Offering, it will not be considered as a “Personal Use Asset” and it will be subject to tax.

Third, Cryptocurrencies may be taxed as ordinary income if used to pay salaries.

Fourth, crypto mining is not considered taxable, unless the fees or cryptos gained through those activities are disposed of as previously mentioned.

 

(III) COLOMBIA

Colombia’s Central Bank, the Financial Supervisory (SF), and the National Tax and Customs Directorate (DIAN) regard cryptocurrencies as assets, comparing them to material goods, meaning they are subject to tax. As such, and surprisingly, the DIAN is the only agency in the world that taxes mining by itself, where every block reward should be taxed as income.

 

Conclusion

There is a lot to be done regarding crypto assets and their regulation. Taxing cryptocurrencies is very complex because it requires a definition and an activity or moment to trigger the taxation. Our view is that it is of the utmost importance to have comprehensive legislation, which gives a framework for the different types of crypto that will allow the ecosystem develop to its full potential.

 

Harris Gomez Group opened its doors in 1997 as an Australian legal and commercial firm. In 2001, we expanded our practice to the international market with the establishment of our office in Santiago, Chile. This international expansion meant we could provide an essential bridge for Australian companies with interests and activities in Latin America, and in so doing, became the first Australian law firm with an office in Latin America.

We provide innovative technology and resources businesses with legal and commercial expertise to realise their global potential. Our goal is to see innovative businesses establish and thrive in the global market. We are proud members of Austmine.

To better understand how we can support your management team in the Region, please contact contact@hgomezgroup.com  

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