Bitcoin taxation in developed countries
In recent years, there has been a steady increase in the use of virtual currencies (e.g., Ethereum, Peercoin, Dogecoin, Litecoin, and Bitcoin). Nowadays, they are widely used not only as payment methods but also as investment instruments. Virtual currencies created a legal vacuum that was gradually filled with regulations.
In this article, we will focus on the taxation of Bitcoin (the most prominent virtual currency). It is a substitute of real money and has a value in real money (for example, it can be exchanged to Euro, U.S. dollars, Australian dollars or other virtual currencies). Usually, transactions with Bitcoin are conducted anonymously through the Internet. Bitcoin is an unregulated virtual currency that is not dependent on any central banks or governmental backing.
Although Bitcoin has not obtained a legal tender status in most jurisdictions yet, some tax authorities have acknowledged its significance and proposed a specific fiscal treatment for this virtual currency. Below, we briefly overview the tax treatment of Bitcoin in the United States, the European Union, Germany, Japan, and Australia.
The United States
The U.S. Internal Revenue Service (IRS) treats Bitcoin as property rather than a currency for federal tax purposes. Thus, any transactions using Bitcoin will be taxed according to the principles applicable to taxation of property. This means that Bitcoin transactions should be reported to the IRS for tax purposes.
U.S. taxpayers who sell goods or services in exchange for Bitcoin are obliged to include the value of the received Bitcoin in their annual tax returns. The value of Bitcoin is calculated on the basis of the fair market value of Bitcoin in USD on the date when the virtual currency was received by the taxpayer (i.e., the exchange rate on the day of receipt).
If the virtual currency is a capital asset in the hands of the taxpayer (similarly to stocks, bonds, and other investment property), the taxpayer must take into account taxable gains and losses. A taxable gain is realized if the fair market value in USD received in exchange to Bitcoin is greater than the adjusted basis of the virtual currency. Consequently, a loss is realized if such a fair market value is lower than the adjusted basis of the virtual currency.
People who engage in Bitcoin mining (i.e., use their computer for validating Bitcoin transactions and maintain Bitcoin transaction ledger) are also subject to U.S. taxation. If the mining proves to be successful, the miner has to include the fair market value of the mined Bitcoin to his/her annual gross income.
Wages paid in Bitcoin are subject to federal tax withholding and other employment-related contributions (e.g., social security). The wages in Bitcoin are taxed on the basis of their fair market value on the date of receipt. Similarly, Bitcoin payments made in the course of trade, such as rent, premiums, annuities, are subject to reporting obligations for fiscal purposes.
Taxpayers who fail to comply with tax laws regarding virtual currencies may become subjects to penalties. Thus, the key for complying with U.S. tax laws and accurately assessing Bitcoin-related taxes is maintaining records of all transactions with Bitcoin.
The European Union
In 2015, the EU’s highest court, the European Court of Justice (ECJ), ruled out that Bitcoin transactions “are exempt from VAT (value-added tax) under the provision concerning transactions relating to currency, banknotes and coins used as legal tender.” Thus, according to the ECJ, Bitcoin is a currency and not property.
Although purchasing and selling Bitcoin does not incur VAT, Bitcoin transactions may be subject to other taxes, such as capital gains or income tax. The fiscal treatment of Bitcoin for tax purposes differs depending on EU country.
In the UK, Bitcoin is treated as a foreign currency. The tax rules applying to currency gains and losses apply to Bitcoin transactions. However, Bitcoin transactions that constitute “speculative transactions” may not be subject to any tax. The UK tax authority, Her Majesty’s Revenue and Customs (HMRC), provides rather vague information about the tax enforcement measures related to Bitcoin transactions. HMRC states that each Bitcoin-related case “will be considered on the basis of its own individual facts and circumstances”.
Bitcoin has been considered a type of private money since 2013. Although Bitcoin is subject to capital gains tax of 25% in Germany, such a tax is levied only if the profits on Bitcoin are acquired within one year after the receipt of Bitcoin. Thus, taxpayers who hold Bitcoin for longer than one year will not be subject to capital gains tax and their transaction will fall within the scope of a non-taxable “private sale”. The treatment of Bitcoin in Germany is similar to the treatment of other investment instruments, such as stocks or shares.
In Japan, Bitcoin is officially recognized as a payment method. The sale of Bitcoin is exempted from consumption tax as of 1st of July 2017. Virtual currencies are treated as “asset-like values” that “can be used in making payments and can be transferred digitally”. Thus, in Japan, profits gained from Bitcoin trading are considered to be business income and treated accordingly for income and capital gains tax purposes.
In Australia, transactions using Bitcoin and other virtual currencies fall within the scope of barter arrangements. The Australian tax authorities consider Bitcoin being not money or foreign currency but an asset for capital gains purposes. Businesses conducting Bitcoin transactions in Australia should properly document, record, and date the transactions. Businesses that receive payments in Bitcoin have to declare their value in AUD as ordinary income.
On the other hand, Bitcoin transactions for personal purposes are exempted from taxation under two conditions, namely, (1) if Bitcoin was used as payment for goods and services for personal use, and (2) the value of the transaction is lower than AUD 10.000. Bitcoin mining and exchange for business purposes in Australia is considered to be stock trading and taxed accordingly.
The regulatory frameworks governing the taxation of Bitcoin differ significantly depending on the jurisdictions. Some jurisdictions (e.g., the EU) consider Bitcoin to be a currency, whereas other jurisdictions (e.g., the U.S. and Australia) consider it to be property or an asset. A third group of jurisdictions (e.g., Japan) follow a middle-ground approach by defining Bitcoin as “asset-like value”.