The tax treatment of cryptocurrencies

The tax treatment of cryptocurrencies Sangwha Shin Korea Institute of Public Finance Feb 22, 2019 Sangwha Shin (KIPF) Feb 22, 2019 1 / 45

Outline 1 Motivation 2 The evolution of cryptocurrencies 3 The tax treatment of cryptocurrencies in major countries 4 The tax treatment of cryptocurrencies in South Korea 5 Conclusion Sangwha Shin (KIPF) Feb 22, 2019 2 / 45

Motivation Why not apply the existing tax treatment to cryptocurrencies? Similar underlying technology, various applications cryptocurrencies, utility tokens, tokenized platform, etc medium of exchange vs. asset access rights to services, asset, or programs Sangwha Shin (KIPF) Feb 22, 2019 4 / 45

Types of Cryptocurrencies Source: www.untitled-inc.com Sangwha Shin (KIPF) Feb 22, 2019 6 / 45

Types of Cryptocurrencies Medium of exchange Acts as a store of value and medium of exchange Bitcoin, Zcash, Litecoin Tokenization Gives rights to other assets, legal tendar, service, platform USDT, GOLD (assets or legal tendar) ETH, STEEM (platform, service) DGO, LKK (share-like) Sangwha Shin (KIPF) Feb 22, 2019 7 / 45

The evolution of Cryptocurrencies Bitcoin aimed to be a medium of exchange without middlemen 1st generation of Altcoins try to improve functionalities of Bitcoin Similar to asset-backed securities Stablecoins: pegged to asset or fiat currencies securitization of service, asset or networks Sangwha Shin (KIPF) Feb 22, 2019 8 / 45

Implications Difficult to define the legal status of cryptocurrencies Cryptocurrencies are diverging Better to focus on how it is used The anonymous aspect of cryptocurrencies can be a threat The tax administration requires enough information of economic activities realated to cryptocurrencies Sangwha Shin (KIPF) Feb 22, 2019 9 / 45

U.S. - Tax treatment The taxation rules on virtual currencies of U.S. is summarized in the notice of IRS 2014 (Notice 2014-21) applied only to the convertible virtual currencies.(for others, no rules yet) Other cryptocurrencies, like utility tokens or securitization tokens, are not applicable to this notice. treated as asset for federal tax purposes Sangwha Shin (KIPF) Feb 22, 2019 11 / 45

U.S. - Tax treatment Recieved virtual currency in return for goods or service fair market value should be included in computing gross income mined virtual currency fair market value of the day it is mined should be included in computing gross income Business mining self-employment income Sale or exchange capital gain (capital asset) / ordinary gains (inventory) Sangwha Shin (KIPF) Feb 22, 2019 12 / 45

U.S. - Regulations Financial Crimes Enforcement Network(FinCEN) 2013 Scope: Virtual currencies works as a medium of exchange exchanger: a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency administrator: a person engaged as a business in issuing a virtual currency, and who has the authority to redeem user: a person that obtains virtual currency to purchase goods or services Sangwha Shin (KIPF) Feb 22, 2019 13 / 45

U.S. - FinCEN 2013 An administrator or exchanger is an Money Services Businesses (MSB), specifically, a money trasmitter subject to MSB registration report suspicious transactions keep records Sangwha Shin (KIPF) Feb 22, 2019 14 / 45

U.S. - Treasury Inspector General for Tax Administration Three recommendations to the IRS develop a coordinated virtual currency strategy in the IRS provide updated guidance to reflect the necessary documentation requirements and tax treatments needed for the various uses of virtual currencies revise third-party information reporting documents to identify the amounts of virtual currencies used in taxable transactions Sangwha Shin (KIPF) Feb 22, 2019 15 / 45

U.S. - Tax administration of IRS IRS collects user information of virtual currency transactions from exchanges send out reminders compliance campaigns IRS uses a John Doe summons to exchanges request information about U.S. taxpayers who conducted transactions in a virtual currency from 2013 to 2015 U.S. taxpayers with more than 20,000 USD account ID, name, date of birth, address, transaction history, etc Sangwha Shin (KIPF) Feb 22, 2019 16 / 45

Japan - Income tax Incomes generated from cryptocurrencies are classified as business income or miscellaneous income exchanges, acquired in business transactions business income personal purpose miscellaneous income Both are under comprehensive tax rate, 5-45% Mining income, new coins from the fork Sangwha Shin (KIPF) Feb 22, 2019 17 / 45

Japan - Consumption tax From 2014 to 2017, cryptocurrencies are under the consumption tax treated as commodities From July 2017, cryptocurrencies are exempt from the 8% consumption tax Sangwha Shin (KIPF) Feb 22, 2019 18 / 45

Japan -Other issues On going discussion on lowering the income tax rate (5-45% 10%) and allowing the deduction carried forward for losses More detailed method of evaluation will be included in the tax law revision in 2019 Sangwha Shin (KIPF) Feb 22, 2019 19 / 45

Japan - Regulations Exchanges are required to register to the Financial Services Agency Obligations of exchanges System risk management User information management Transaction keeping obligation suspicious transaction reporting The self-regulatory status of the cryptocurrency industry (2018.10.) permit the Japan Virtual Currency Exchange Association to police and sanction exchanges for any violations Sangwha Shin (KIPF) Feb 22, 2019 20 / 45

Japan - Tax administration NTA recomment the exchanges to issue the annual report to customers for transactions after 2018.1.1. This annual report will be issued in electronic form, which can be directly used for a software program provided by the National Tax Agency Exchanges also issue the certificate of balance for inheritance tax report purposes Sangwha Shin (KIPF) Feb 22, 2019 21 / 45

Japan - Tax administration From 2019, high-income and asset taxpayers should report the blances of cryptocurrencies by type, usage, maket prices The National Tax Agency can acquire the personal information of users from exchanges Sangwha Shin (KIPF) Feb 22, 2019 22 / 45

Canada - Income tax Canada Revenue Agency(CRA) treat cryptocurrencies as commodity in income tax act (2013) using cryptocurrencies to purchase goods or services would be treated as a form of barter transaction Income related to business ordinary income, 15-33% comprehensive tax Income not related to business capital gain, only 50% of capital gain will be under 15-33% comprehensive tax rate Sangwha Shin (KIPF) Feb 22, 2019 23 / 45

Canada - GST Cannot find the official tax guidelines for GST Generally, financial services are exempt from GST. But, cryptocurrencies are treated as commodity. Sangwha Shin (KIPF) Feb 22, 2019 24 / 45

Canada - Regulations Gazette, Part I, Volume 152, Number 23 implement a full compliance program and register with Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) record-keeping and reporting obligations in the case of a transaction of $1,000 or more, the name, address and telephone number of the person or entity that requests the exchange, the nature of their principal business or their occupation and, in the case of a person, their date of birth; Sangwha Shin (KIPF) Feb 22, 2019 25 / 45

Canada - Regulations Three recommendations from House of commons (Standing Committee on Finance / 2018.11.) 1) crypto-exchanges as money service businesses (MSB) 2) regulation on crypto-wallets; proper identification is required, true ownership of wallets is known to the exchanges 3) establish a license for crypto-exchanges / anti-money laundering program (the State of New York s program as a model for best practices) Sangwha Shin (KIPF) Feb 22, 2019 26 / 45

Canada - Tax administration The CRA can request information from cryptocurrency related organizations with a court order Taxpayers are required to report the CRA if they own specified foreign property (including cryptocurrencies) that in the aggregate cost more than $100,000 Sangwha Shin (KIPF) Feb 22, 2019 27 / 45

German - Income tax If the mining is an occasional activity miscellaneous income If cryptocurrencies are acquired or produced as part of profit-making commercial activity business income The exchange of cryptocurrencies into euros or another cryptocurrency it leads to private sale, taxable transaction Sangwha Shin (KIPF) Feb 22, 2019 28 / 45

German - VAT The judgment of the European Court of Justice(ECJ) in 2015 The exchange of conventional currencies into the virtual currency and vice versa falls under the exemption in VAT Directive If the cryptocurrencies will be exchanged for traditional currencies, the transactions constitute the supply of services However, those are treated as transactions under the provision of currency, bank notes and coins used as legal tender, which is exempt from VAT Sangwha Shin (KIPF) Feb 22, 2019 29 / 45

German - Regulations BaFin classifies Cryptocurrencies as one type of financial product, units of account Business related to cryptocurrencies are required to get authorisation from BaFin New tokens in the ICO may not be classified as units of account. Tokens can be security, share, or capital investment. Case by case. Sangwha Shin (KIPF) Feb 22, 2019 30 / 45

German - Regulations Gemany follows 5th anti-money laundering directive in 2018, which includes new rules related to cryptocurrencies. EU countries need to revise their law system accordingly by 2020 Providers engaged in exchange between cryptocurrencies and fiat currencies, custodian wallet providers are added as the obliged entities Restrict anonymity: exchanges, wallet providers should be registered Financial Intelligence Units(FIUs) should be able to obtain information to associate cryptocurrencies addresses to the identity of the owner of cryptocurrencies to combat the risks related to the anonymity Sangwha Shin (KIPF) Feb 22, 2019 31 / 45

Australia - Income tax Guidance from Australian Taxation Office (ATO) in 2014; more detailed guideline in 2018 Cryptocurrencies are considered as property for tax purposes Businesses related to exchange, sale, and mining of cryptocurrencies ordinary income Gains from disposing cryptocurrencies for personal uses capital gain, comprehensive tax less than AUD 10,000 will be disregarded Sangwha Shin (KIPF) Feb 22, 2019 32 / 45

Australia - GST Cryptocurrencies are not subject to GST form 1 July 2017 Cryptocurrencies are treated the same way as physical money for GST purpose Prior to 1 July 2017, consumers who use cryptocurrencies can bear GST twice : Once on the purchase of the cryptocurrencies and once again on its use in exchange for other goods and services subject to the GST Sangwha Shin (KIPF) Feb 22, 2019 33 / 45

Australia - Regulations On 3 April 2018, Australian Transaction Reports and Analysis Centre(AUSTRAC) commenced regulation of cryptocurrency exchanges All cryptocurrency exchanges must be registered with AUSTRAC identify and verify the identities of customers report suspicious transactions involving physical currency that exceed AUD 10,000 or more Sangwha Shin (KIPF) Feb 22, 2019 34 / 45

Australia - Tax administration The ATO is entitled to access to AUSTRAC information The ATO announced that they will use 100-point identification checks and data-matching technologies 100-point identification: more detailed checks on identities data-matching: matches the ATO s information with other data Sangwha Shin (KIPF) Feb 22, 2019 35 / 45

Summary Table: Summary - tax treatment Country Income Tax classification tax rule classification tax rule VAT U.S property business income / capital gain - - Japan commodity business income / miscellaneous income means of payment exemption Canada commodity business income / capital gain unknown unknown German private capital asset business income / capital gain means of payment exemption Australia property business income / capital gain currency exemption Sangwha Shin (KIPF) Feb 22, 2019 36 / 45

Summary Table: Summary - Regulations Country report obligation of taxpayer anti-money lanundering on exchanges U.S yes (asset) yes Japan yes (2020 ) yes Canada yes (100,000 CAD ) yes German - yes Australia - yes Sangwha Shin (KIPF) Feb 22, 2019 37 / 45

Legal status There is no agreed legal status of cryptocurrencies. Currency: The Korean government made it clear that cryptocurrencies are not a legal tender Financial product: Only securities and derivatives are belongs to the financial product in the current law Asset: The economic value of Bitcoin has been recognized by the court (Intangible property). Sangwha Shin (KIPF) Feb 22, 2019 39 / 45

Studies on tax treatment of cryptocurrencies There is no official statement from the government. Many studies on this topic. Most of them focus on tax on capital gain and value-added tax. No disagreement on using the existing tax rules of the corporate income, inheritance, and gift Sangwha Shin (KIPF) Feb 22, 2019 40 / 45

Capital gain tax The current capital gain tax rules lists types of incomes Some studies argue that the income from buying/selling cryptocurrencies are not taxable as it is not on the list The revision of tax law in this regard is expected in many studies Sangwha Shin (KIPF) Feb 22, 2019 41 / 45

Value added tax Some studies interpreted the cryptocurrencies as intangible asset, which is under the VAT On going debates, but currently there is no VAT on purchasing/selling cryptocurrencies Sangwha Shin (KIPF) Feb 22, 2019 42 / 45

Other regulations The anti-money laundering regulations on the financial institutions Enhanced checks on identities Obligations to report suspicious transactions The anti-money laundering regulations are not directly on the business related to the cryptocurrencies ICO is forbidden / No margin trading in exchanges Sangwha Shin (KIPF) Feb 22, 2019 43 / 45

Summary The tax rules of the major countries are similar to each other provide guidelines to the cryptocurrencies that can be used as a medium of exchange existing tax rules can be applied to the asset-like cryptocurrencies Stablecoins should be reviewed to apply the existing tax rules (case-by-case) Needs regulations to control for the anonymity regulations on the crypto-exchanges are required regulations on wallet-providers The international cooperation is very important to deal with fully anonymous cryptocurrencies Sangwha Shin (KIPF) Feb 22, 2019 45 / 45