Recent directives released by the IRS, HMRC and other national tax authorities sought to clarify the tax implications of transacting cryptocurrency. The expository documents dispelled the idea that, by dint of their idiosyncrasies, virtual currencies might somehow be immune to tax laws. Undoubtedly enforcement efforts will escalate in the years ahead, particularly as interest in cryptocurrency grows and the number of emerging tokens appearing on exchanges rises. The government is always going to want its cut.
Some countries don’t tax crypto
Or not, as the case may be. Nations like Belarus, Malta, Portugal, Singapore and Germany (if you’ve held the assets for more than a year) are, for the time being, bucking the trend by foregoing capital gains tax on crypto. If you’re fortunate enough to live in such a country, your cryptocurrency trading activity is unlikely to land you with a hefty tax bill. But if you’re not, well, you’d better get your house in order. While you don’t necessarily have to use crypto tax software, it’s by far the best option if you’re looking to save time and spare yourself a headache.
Tools like Blox came about order to meet the mess caused by the ever-changing crypto tax regulations.
Tax agencies are cracking down on crypto
The aforementioned directives are rather extensive, and won’t be covered exhaustively here. But in a nutshell, the authorities want us to know that they are getting better at tracing virtual funds back to their owners, and that they are actively pursuing evaders. They want us to know that for tax purposes, virtual currencies should be treated like property. That taxes on crypto must be reported in the relevant national currency, using consistent methodology (i.e. using a crypto price index to determine fair market value of each transaction). And that we must diligently keep records of every single transaction involving virtual currencies.
Of course, it’s tougher for tax authorities to grapple with the cryptosphere than the regular financial domain. Perhaps that’s why five years passed between the IRS’s first notice, in 2014, and their last, in October 2019. The latter addressed such peculiarities as hard forks, wherein new cryptocurrency can be created on a fresh distributed ledger in addition to legacy currency on the original distributed ledger. It also tackled air drops, as did HMRC’s latest guidance.
What about tax on like-kind exchanges?
Suffice to say, many questions still remain. Following the IRS’s latest guidelines, for example, confusion about the tax implications of like-kind exchanges reigned. This was because, in December 2017, the IRS enabled taxpayers to postpone paying tax on the gain of a sale providing the proceeds were reinvested in a similar property (Section 1031). So, what if you reinvested the profit you’d made from selling crypto into another digital asset? What about promotional airdrops, whereupon startups give away free tokens to drum up interest? What about transactions conducted on exchanges that no longer exist?
There were ambiguities in HMRC’s policy paper too. Actually, ambiguities would be putting it mildly: the paper did not even discuss utility and security tokens, glancingly referring to both while suggesting “a different tax treatment may need to be adopted.”
All of which is to say that as things stand, cryptocurrencies throw up a host of regulatory questions. It’s just down to the regulators to be crystal clear on the answers.
The importance of maintaining crypto tax records
In the meantime, it’s sensible to keep up-to-date records of your activity in the cryptosphere. Every territory is different, but for the most part you are obligated to record the date and time each unit is acquired, the market value when it was acquired, the date each unit was sold, exchanged or otherwise disposed of, the market value of each unit when it was sold, exchanged or disposed of, and the amount received for each unit. Reputable tax software can simplify the process while also helping you reduce your liability. Unsurprisingly, many tax preparation platforms have reported a huge increase in traffic since the IRS’s recent missives.
Users claiming to be unaware of the tax implications of their cryptocurrency transactions are wasting their breath. While we all crave greater clarity from the authorities, individual agency should be exercised in case an audit lands in your letterbox. It’s down to you.