update 1 September 2021

A Guide to Legislation and Taxation on Cryptocurrencies

Cryptocurrency Legislation

Over the past 4-5 years, the legislation of cryptocurrencies, blockchain, and similar instruments has become one of the most important 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. Governments worldwide are acknowledging 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. A lot of enthusiasts argue regulation and oversight diminishes 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:

Certain jurisdiction has already taken up the task of forming regulations and taxation policies concerning cryptocurrencies. 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 monetary value, while others chose to classify them as property or assets, or commodities.

Some of the major 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 legal tender and have 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 being 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 be 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 cryptocurrencies regulation and even refuses to consider bitcoin as a legal tender. Speculations are considered taxed under capital gains as bitcoin is considered 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. Cryptocurrency exchanges are allowed to 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 up 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, has gone as far as accepting Bitcoin for tax payments. This frees up the hindrances in opening a Blockchain-based startup. Bitcoin is openly accepted as a legal tender, and the acceptance rate has been steadily increasing.

Taxation Procedures

There are roughly three ways jurisdictions worldwide have taxed bitcoin and related cryptocurrencies.

As an Asset/Property

In jurisdictions such as the USA, India, South Korea, etc., bitcoin is generally viewed as property. Speculative gains on bitcoin are taxed under Capital Gains laws. There are three events under which Capital Gains apply. 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 bought, 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 in this way, meaning that 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 is applicable on the purchase of cryptocurrencies.

As a Currency

Unlike common fiat currency, Bitcoin, however, does not have a centralized governing authority. It is also not tied to any country or geography as fiat money usually is to 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, 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 the sovereign currency. 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 provide a barrier to scrupulous practices and protect the interest of the consumer. Well planned regulation 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 regulation. Blockchain will reach its full potential in places where regulatory oversight and innovation thirst go hand in hand.

The problem faced by all the governments worldwide is that it is virtually impossible to control the use, propagation, and adoption of cryptocurrencies. They can try to slow down the propagation by asking intermediaries to disassociate themselves with anyone found to do so. Isolating the users so that the “virus” doesn’t spread.

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 form a basic framework are reported to benefit from innovation’s inflow hugely. Blockchain start-ups can pop up in places where legislations are hugely favorable. Malta, Estonia, Switzerland have all seen immense traction in this case.

Btc
Bitcoin
$42.868
price
2.93007%
price change
BUY NOW

Featured image courtesy of Shutterstock.

More posts

Can You Gamble with Crypto in Las Vegas

Las Vegas is best known for gambling with an enormous concentration of world-class casinos and hotels. This entertainment hub situated in the State of Nevada attracts thousands of tourists across the world to experience the glamour and gambling life. Following the massive growth of Bitcoin in recent years, Las Vegas has increasingly embraced it, with widespread use, especially as a mode of payment for dining, rent, cars, etc. Over fifty businesses in Las Vegas, Nevada accept cryptocurrency as a mode…

Cases of the Longest Bearish Price Trends in the Crypto Market

The crypto world's decade-long existence has not been flawless. Like in any other market, there is always a bear trend that leads to massive losses. The 2008 market crash is one of the biggest bear markets in the financial world, and others occurred in the following years.  Crypto has seen cases of long market crashes as well, some lasting over a year. This guide will be looking into 5 of the must-know crypto market crashes. Furthermore, it will highlight the…

Who will enter the CryptoSphere first: Amazon or Facebook?

Amazon and Facebook are some of the biggest technology companies in the world and have long been the main drivers of tech innovation across the globe. These two companies have substantially impacted billions of internet users, whether it's through Facebook's pioneering and massively successful social media platform or Amazon’s enormous e-commerce platform and cloud computing services.  Both Amazon and Facebook have made several steps in the cryptosphere pushing for the adoption of cryptocurrencies and blockchain technology. In fact, Facebook and…

What Really Happens When Swapping Cryptos?

The process of swapping cryptocurrencies can be somewhat complex. Sometimes, you may end up lacking the exchange assets you need. For instance, you may want to exchange BTC for ZIL. Generally, there are very few exchanges that support direct BTC to ZIL exchanges. Therefore, in many scenarios, an individual will have to find a BTC trading pair. Exchange the BTC to another pair connected to ZIL, then complete by exchanging the second asset to Zil. Generally, following the whole exchange…

Could Brexit be the Underlying Reason for Developing The Digital Euro

After the election in December 2019, the British Parliament decided to ratify the withdrawal from the European Union. Factors that influenced Brexit included immigration, sovereignty, anti-establishment politics, among others. Could Brexit have influenced the development of the digital Euro? Read on to find out as we break down factors that led to the development of digital currency. The Growth of Digital Assets The concept of digital assets is not novel; its penetration and influence have left no stone unturned. The…

What Are Crypto Validators and How do They Work?

Crypto Validators are new "payment processors" in decentralized networks, and as such, they produce blockchain rewards. It sounds simple, doesn’t it? However, the definition of validators in crypto is much more complex than that. Also, the role of a validator may change depending on the consensus mechanism that each blockchain uses. In this guide to validators in blockchain, we take a closer look at this entity and its indispensable role. Furthermore, we analyze four validator use cases in different blockchains…

How Many ETH Will Burn After the London Fork?

Since its launch in July 2015, Ethereum has grown exponentially to be the second leading cryptocurrency in market value after Bitcoin. The platform’s growth has primarily been attributed to its smart contract feature, which powers the deployment of a wide range of applications, including oracles, decentralized finance (DeFi), decentralized exchanges (DApps), marketplaces, crypto-collectibles (NFTs), and developer tools.  Despite its growth, Ethereum faces numerous challenges that hinder its usability. The scalability challenge is one of the biggest ones that Ethereum faces. The current state…

The Impact of Adoption of Cryptocurrencies on E-commerce Business

E-commerce is the short form of electronic commerce. It is the buying and selling of merchandise over the internet networks. It also involves the transfer of funds and the keeping of records to certify the transactions made. E-commerce is of three types; business-to-consumer (B2C), business-to-business (B2B), and business-to-government (B2G). The main reason for using cryptocurrencies in e-commerce is to get rid of third parties that control the transactions. This relationship can make online shopping much easier and safer since blockchain technology that backs up cryptocurrencies is…

What it Means to Make Bitcoin a Legal Tender

June 9, 2021, marks the first move that would make history in Bitcoin's timeline. El Salvador passed a bill where 62 of 84 congressional voters would make Bitcoin a legal tender. Fast forward to September 7, and El Salvador became the first country to make Bitcoin a legal tender. In this article, we shall look into what it means for Bitcoin to be a legal tender in detail; What is Legal Tender? "This note is legal tender for all debts, public and…

The Correlation Between Blockchain Activity and Transaction Fees

Miners and validators are essential cogs in any crypto project. They're the ones who process transactions on a blockchain (BC) activity. For their efforts, crypto projects compensate them for their efforts from transaction fees. A transaction is only valid when it has undergone validation. The process ends in the validators adding it to the BC. Mining consumes a lot of computing power. As such, it's an energy-intensive exercise. The motivation for the miners is the block reward that consists of…