Get the weekly summary of crypto market analysis, news, and forecasts! This Week’s Summary The crypto market ends the week at a total market capitalization of $2,17 trillion. Bitcoin continues to trade at around $62,300. Ethereum experiences no changes and stagnates at around $2,400. XRP is down by 2%, Solana by 1%, and Dogecoin by 3%. Almost all altcoins are trading in the red, with very few exceptions. The DeFi sector decreased the total value of protocols (TVL) to around…
A Guide to Legislation and Taxation on Cryptocurrencies
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Cryptocurrency Legislation
Over the past 4-5 years, the legislation of cryptocurrencies, blockchain, and similar instruments has become one of the most critical regulatory authorities’ tasks. Even though regulation is of utmost importance, the sudden spark has its reasons. Scrupulous practices such as ICO scams, exchange hacks, unregulated creation of monetary schemes, etc., have made it necessary. As a result, governments worldwide acknowledge the importance of regulatory oversight for keeping a check on the space.
This has received a lot of backlash from certain personnel within the sector. But on the other hand, many enthusiasts argue regulation and oversight diminish the reason for the existence of cryptocurrencies and blockchain.
Governments are majorly concerned with the cryptocurrency aspects of Blockchain technology. A Cryptocurrency directly challenges the monetary authority within their country. Introducing a new form of monetary value for daily use starts a competition between a cryptocurrency and a sovereign currency. Governments most usually perceive this as an act of hostility rather than an economic innovation.
Perception of Cryptocurrencies among Jurisdictions:
Specific jurisdiction has already taken up the task of forming regulations and taxation policies concerning cryptocurrencies. However, the perception of cryptocurrencies differs from jurisdiction to jurisdiction, depending upon their degree of hostility. Many countries have outright dismissed their use as it challenges their sovereign power. Some countries acknowledge bitcoin and other cryptocurrencies as having monetary value, while others classify them as property, assets, or commodities.
Some of the significant jurisdiction and their response to cryptocurrencies are:
United States of America
The USA’s legislation dates back to 2014 when a taxation guideline was circulated, explaining taxing gains from cryptocurrencies. This guideline assumes by default that bitcoin and similar instruments are nothing but investment mechanisms. Meaning they should be taxed like any other asset or property. Its consideration as a legal tender was dismissed, but its federal nature varies from state to state. Recently, the USA also came up with The Virtual Currency Tax Fairness Act of 2020. According to the bill, anyone with gains under $200 in a tax year won’t have to report anything cryptocurrency related to their tax returns.
China
China has publicly condemned the use of cryptocurrencies and refuses to acknowledge its innovation capabilities reasoning the monetary nature of bitcoin. ICOs are banned as they are seen as an unregulated mechanism for raising funds, and banks are not allowed to handle anything relating to bitcoin or other cryptocurrencies. The country also doesn’t recognize bitcoin as a legal tender and has continually been harsh towards cryptocurrency growth. In 2019, the president of China ignored cryptocurrencies but acknowledged the importance and influence of blockchain. China is currently on the fast track to becoming a Blockchain hub of the world.
India
The regulations concerning cryptocurrencies are quite foggy in India. The government has effectively banned any financial institution from holding, accepting, or being involved with any business or entity dealing in bitcoin and other cryptocurrencies. There are but a few guidelines concerning its taxation. India has repeatedly delayed commenting on cryptocurrency regulation and even refuses to consider bitcoin a legal tender. Speculations are taxed under capital gains as bitcoin is regarded as a commodity under the Income Tax Authorities.
Singapore
Although cryptocurrencies are not considered legal tender, Singapore’s tax authority treats Bitcoins as ‘goods’ and applies Goods and Services Tax. As a result, cryptocurrency exchanges can function freely without any regulation, enabling an influx of innovation. Singapore is continually striving to stimulate innovations in the Blockchain sector to ensure its ability to be ahead of time. In 2018, almost a dozen blockchain-based startups opened shop in Singapore, citing its friendly approach.
Switzerland
Switzerland has taken an open-arms approach when compared to other jurisdictions. They openly accept cryptocurrencies and their innovation capabilities. Certain cities, such as Zug, which markets itself as the Silicon Valley of Blockchain, have accepted Bitcoin for tax payments. This frees up the hindrances in opening a Blockchain-based startup. Bitcoin is openly acknowledged as a legal tender, and the acceptance rate has steadily increased.
Taxation Procedures
There are roughly three ways jurisdictions worldwide have taxed bitcoin and related cryptocurrencies.
As an Asset/Property
In jurisdictions like the USA, India, South Korea, etc., bitcoin is generally viewed as property. As a result, speculative gains on bitcoin are taxed under Capital Gains laws. There are three events under which Capital Gains apply. First, buying/selling cryptocurrencies, exchanging one for another, and spending cryptocurrencies to buy goods or services. In all these events, users expected to take note of the price at which the cryptocurrency was purchased, the price at which it was sold, the price at which it was exchanged, and the price at which it was sold was spent. This effectively ensures that the sovereign currency is used for reporting and taxation purposes.
As a Commodity
Due to its uncanny resemblance to Gold, bitcoin is sometimes considered a commodity. A commodity has a limited, typically fixed, supply because, unlike a stock certificate, you can’t just type up another ton. Also, the pricing is set almost entirely by supply and demand. Indonesia and other jurisdictions view Bitcoin this way: bitcoins can be bought just like any other commodity, such as cars, food, Gold, etc. No taxation is required on speculation, but a Value added tax or its equivalent applies to the purchase of cryptocurrencies.
As a Currency
Unlike common fiat currency, Bitcoin does not have a centralized governing authority. It is also not tied to any country or geography, as fiat money usually is for everyone’s pleasure. Governments are generally not comfortable with the idea of bitcoin as a currency, as it prospectively dissolves the sovereign’s right to a monetary monopoly.
Switzerland, Malta, and Estonia are places where Bitcoin is considered a legal tender, while France joined them recently. Effectively, bitcoin can be used just like any other currency to buy and sell goods and services, functioning as a substitute for sovereign money. In such cases, taxes are not levied on bitcoin but can be paid in bitcoin.
Advantages of Legislation
In most cases, regulation acts as a safety net for the public. Bitcoin and blockchain are merely a decade old, and most people who try to get into the ride have a bare minimum or nil understanding of the technology. Regulations will prevent ethical practices and protect the consumer’s interest. Well-planned law will ultimately differentiate cryptocurrencies into different architectures based on the function they serve. They can then tokenize traditional assets in a way that reflects and enforces existing real-world regulations. Blockchain will reach its full potential in places where regulatory oversight and innovation thirst go hand in hand.
The problem faced by all governments worldwide is that it is virtually impossible to control the use, propagation, and adoption of cryptocurrencies. However, they can try to slow down the propagation by asking intermediaries to disassociate themselves from anyone found to do so. It isolates the users so that the “virus” doesn’t spread.
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It is in the best interest of regulators to try and form a regulative guideline for using and innovating in cryptocurrencies and blockchain. Jurisdictions that have managed to create a basic framework are reported to hugely benefit from innovation’s inflow. Blockchain start-ups can pop up in places where legislations are tremendously favorable. Malta, Estonia, and Switzerland have all seen immense traction in this case.
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Sudarshan M
@Sum
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