Over the past few years, cryptocurrencies have become more mainstream and more widely accepted. Cryptocurrencies are built on blockchain technology: encrypted, distributed ledgers. It is decentralised and lacks governmental oversight.

As cryptocurrency values are very volatile, investors can make astronomic profits by trading in crypto. Over the past years, trading volumes have soared.

Despite its lack of government oversight, governments and tax authorities are starting to set up frameworks to tax crypto currencies. One of the main issues of crypto taxation is categorising what cryptocurrencies are. There are debates about whether crypto are currencies, assets or securities.

How a person uses crypto should also be considered: was it bought as an investment, used for payment, received as salary or perhaps as a gift or part of their inheritance.

The kind of tax the cryptocurrency will attract depends on the tax authority’s definition of cryptocurrency, together with the person’s intended use.

Currently, most jurisdictions don’t have a fiscal regulatory framework regarding crypto and NFT taxation of transactions. However, there are several crypto tax developments worldwide, which we will discuss in more detail below.

Crypto Tax Regulation Around the World

USA

In the USA, almost every cryptocurrency transaction may be taxable and should be reported.Based on a 2014 IRS ruling, it was determined that cryptocurrency should be treated as a capital asset, like stocks or bonds, rather than a currency.

Capital assets are taxed whenever they are sold at a profit (not when sold at a loss). What makes matters more complicated is when you buy something with crypto and that crypto amount has gained in value since you acquired it, you have to pay capital gains tax on this spending.

On the other hand, if you are being paid in cryptocurrency, that will be treated as taxable income.

Australia

The Australian Tax Office (ATO) doesn’t view cryptocurrency as actual money, like dollars or any other fiat currency. Depending on your activity, you are subject to capital gains tax (investor) or assessable as ordinary income (trader).

Understanding whether you are categorised as a cryptocurrency investor or trader is crucial to knowing your tax obligations.

To determine whether you are an investor or a trader, the following factors will generally be considered:

• The nature and purpose of your activities, for example, whether you are trading for commercial reasons and in a commercially viable way
• Undertaking activities in a business-like manner, such as preparing business plans etc.
• Repetition, regularity and scale of the activity of trading

That being said, most people will fall under the category of ‘investor’. This is due to the fact that, most commonly, people will predominantly deal with crypto as a personal investment and most of your earnings come from long-term gains.

As an investor, cryptocurrencies are viewed as a ‘property’, an asset on which you have to pay capital gains tax. Because traders carry out a profit-making activity, in this case the ATO taxes your cryptocurrency as ordinary income. Even if you don’t declare your cryptocurrency activities, whether as an investor or trader, the ATO is aware of it.

From May 2019, the ATO started collecting records from Australian crypto designated service providers (DSPs). DSPs include anything from cryptocurrency exchanges, brokerage services, payment facilitators and more.

So as an Australian crypto investor or trader, it is important to get familiar with the local tax legislations and file it on your tax return.

Hong Kong

Hong Kong’s Money Authority (HKMA) defines cryptocurrencies as “virtual commodities”, not as legal tender (officially recognised currencies). While in the USA and Australia we have seen crypto mainly being subject to capital gains tax, this is not the case in Hong Kong.

In Hong Kong, there is no capital gain tax. Investors buying and selling financial investments at a profit don’t have to pay tax on these sales.However, frequent crypto trading as a “normal course of business” is treated as income, making it subject to income tax also known as profits tax in Hong Kong (16.5% cap).

The Inland Revenue Department (IRD), responsible for tax collection in Hong Kong, notes the classes of crypto assets as:

• Payment tokens,
• Security tokens, or
• Utility tokens

Taxation related to Initial Coin Offerings (ICOs) depends on whether the ICO is viewed as a securities offering or more a futures or exchange of service/goods contract.

Which Country has no Crypto Tax?

There are many countries where there are no taxes on cryptocurrency transactions, depending on your circumstances. Please note that, depending on which jurisdiction you are residing, you may be subject to tax on cryptocurrency.

Some of these crypto tax-free countries include Germany, Singapore, Portugal and Switzerland. However, they may tax business cryptocurrency income or any other way, so it’s important to discuss this with a professional tax advisor.

China’s Recent Ban on Cryptocurrency

Even though cryptocurrencies get bigger and become more mainstream in many countries, China is going against the trend. The world’s second-largest economy recently intensified a crackdown on cryptocurrencies with a blanket ban on all crypto transactions and mining.

The People’s Bank of China (PBOC) said cryptocurrencies must not circulate and that overseas exchanges are barred from providing services to China-based investors. It also banned financial institutions, payment companies and internet firms from facilitating cryptocurrency trading nationally.

How HKWJ Can Help

Cryptocurrency investments are risky and volatile, which might result in significant gains. If you have experienced this, tax planning might help you reduce the taxes you owe on your crypto gains.

At HWKJ Tax Law, we have skilled tax consultants with over 45 years of combined experience, including tax planning.

Crypto tax is extraordinarily complicated and constantly changing. Its tax implications might change in the future. Therefore, it’s best to consult a tax advisor to ensure you are tax compliant and avoid further liabilities.