TAXATION AND CRYPTOCURRENCY

Need For Clarity And Harmonisation.

Photo by Kanchanara on Unsplash

By Dominic Kapalu

When we talk of cryptocurrency the big question we should ask is how is it viewed from country to country? The analogy I read in my course on Taxation, with the University of Nicosia is, it's like an Elephant. The one holding the leg of the Elephant will think they are holding a tree, the one holding the Trunk will think it's a Snake, the one holding the upper body will think it's a wall and indeed the one touching the trunk thinks it's a spear.

Looking at this, should already give you an idea of how the taxation element will be treated by different countries. And of all the countries that have developed a tax regime the most conclusive is the American one. Though most of the developed countries including the EU have some form of taxation guidelines, it is not conclusive.

With that out of the way, how does the United States of America treat cryptocurrency in terms of tax. They treat it as property so it is falls under Capital gains tax. Capital gains tax is also charged on real estate, art, stock and bonds. The advantage in this is that the tax rates are better than ordinary income tax. How much has the asset increased in value since the time you bought it? This tax will fall due when there is a sale either in crypto or fiat and a profit has been realized.

But in a situation where daily transactions are made, at every purchase made in crypto, you have to calculate how much tax is due in terms of capital gain or loss. This is cumbersome but it has to be done as the price of Bitcoin fluctuates but one of the inputs in the calculation is the price of Bitcoin at current price.

Other income received in crypto including salaries are all treated as ordinary income and taxed. The controversy though comes when there is a hard fork . A hard fork is when a Blockchain permanently creates a divergence from the previous version of the Blockchain. And normally this results in the creation of a new token or cryptocurrency. A hard fork created Bitcoin cash (BCH) which is different from Bitcoin (BTC).

In a hard fork though, you pay tax at ordinary income rates and current price of the token but what happens normally is the newly created token or cryptocurrency will lose value because of too much liquidity meaning a loss to you since you paid tax on a higher price.

In conclusion tax laws in different jurisdictions have not yet been harmonized but as cryptocurrency gets more mainstream we look forward to a more harmonized tax regime across many countries.