The Regulation & Taxation of Crypto Currency: A Discussion

The Regulation & Taxation of Crypto Currency: A Discussion

As part of our inaugural international tax conference, we held a highly insightful panel on the taxation and regulation of Bitcoin and blockchain technology.
 
Perspectives from Malta, the UK, Israel and Cyprus were shared, and plenty of our members’ questions were answered.
 
As Dmitry Zapol, an International Tax Advisor & Partner with Interfis in the UK, said, this particular sector is “very unregulated from the regulatory and tax perspective,” so this was a great opportunity to gain further insight into what’s being done to bring Bitcoin into the mainstream.
 
Meori Ampeli, a Tax Lawyer in Israel, sees a big “gap between our limited technological knowledge as tax lawyers and the technical industries.”
 
“With progress coming very fast,” Ampeli said, “the tax authorities have fallen behind, and all those gaps have created a lot of advantages, but also a lot of uncertainties.”
 
Ampeli believes “we are only in the first stage” of the crypto currency revolution.
 
He added: “It will take time for the banking system to accept it and learn how to work together. It will take time for the regulators to understand the specific issues. It will take time until we clean up all the money laundering issues, because we know crypto currencies provide an advantage to dark powers that involve them.”
Hence, in an effort to lessen this gap, discuss topical issues in the crypto currency real and move the sector forward, here are some of the panel’s main highlights.

Malta: Blockchain Island Leads the Way
Malta: Blockchain Island Leads the Way

When pressed by our moderator, Dr. Charis Savvides, a Law Lecturer with the University of Nicosia in Cyprus, our panelists concluded that Malta leads the way when it comes to the regulation of all-things crypto.
 
Thomas Jacobsen, Managing Director of Malta-based Papilio Services Ltd.Thomas Jacobsen, Managing Director of Malta-based Papilio Services Ltd., remarked that his jurisdiction “has put a lot of effort into becoming the first mover, especially within the EU with regards to regulating the technology, regulating the industry and regulating the products.”
 
Facilitated by “a three-pronged approach” defined by a distinct set of regulations, Malta has come to the crypto world’s forefront.
 
Jacobsen explained: “We have one type of legislation, which has set up what we call the Digital Innovation Authority, which is the overseeing authority when it comes to the technology. We have a legislation, which is called the Innovative Technology Arrangements and Services Acts, which looks at the distributed ledger technology software, architecture and smart contracts and the technology services with regards to system audits and technical administration. Finally, the third part of the legislation is the Virtual Financial Assets Acts, which looks at ICOs, the admission to trading on an exchange of the tokens or the coins that are being produced, and the provision of the services surrounding the technology
 and tokens, for example, the provision of exchanges.”
 
Jacobsen believes Malta has become attractive to the crypto currency world for reasons that are “not tax-related but regulation-related.”
 
“The fact that you can have your technology or your asset regulated in a EU jurisdiction makes it easier to sell to potential investors,” Jacobsen said. “The regulation regime combined with an effective tax system means that Malta becomes attractive to people.”
 
However, he did emphasize, “Not everything is in place, as the authority that will issue the licenses is nowhere near finished and ready, and a lot of it remains to be seen. But at least the regulations are there, and we’re up and running.”
 
Dmitry Zapol, who's based out of LondonDmitry Zapol, who’s based out of London, “would love to say that the UK is at the forefront of all-things crypto but unfortunately that’s not the case.”
 
“The UK is almost at the forefront of the distributed ledger technology…but creating blockchain projects and dealing with taxation and regulating token issues are completely different,” he said.
 
Besides Malta, Zapol believes Switzerland is playing an important role in the crypto currency world.
 
“Switzerland obviously has a crypto valley, which is like a regulatory sandbox where almost everything is permitted, but it has the definitive rules for taxation and regulation, and many companies go there,” he said.
 
Meori AmpeliFurthermore, Meori Ampeli explained “Israel is not in a position different to many other places.”
 
However, “from the tax perspective, we do have some certainty,” he said. “We know that Bitcoin and all those tokens are assets, so we’re exposed to either capital gains of 25 or 28 percent for individuals, but, if you’re classified as a business, then your exposure as an individual is up to 50 percent.”
 
Ampeli does ascertain that things will progress as “the crypto community is very strong in Israel and they create a lot of pressure on the government to stabilize things and attract foreign players to come to the blockchain zone.”
 
As a technologically advanced country, Ampeli said Israel has “an advantage to develop those areas and that’s something I think we’ll be better at.”

Crypto Assets & the Question of Territoriality
Crypto Assets & the Question of Territoriality

Dmitry Zapol provided an in-depth look at the question of territoriality from a UK perspective:
 
“When we’re speaking about territoriality, we’re moving into the area of personal taxation, because in the UK, companies have worldwide taxation. We have a special regime in the UK, which is colloquially known as res non dom. Basically, it means that if you’re a person without a British domicile, you have the right not to pay any tax on any income that you derive from outside the UK. Consequentially, if you’re selling an asset that is located outside of the UK, then you don’t need to pay any tax on it.”
 
“Now, the big question: where is the token? This question has been raised in the last year when the reporting period has come in the UK. There is no answer unfortunately because HMRC surprisingly issued a brief back in 2014, which is a century in terms of Bitcoin and tax regulation, but didn’t say anything about the nature of Bitcoin. There have been attempts made to answer this question. If we go to the traditional legislation, it could be considered an intangible asset and its jurisdiction is determined by which law is issued and what regulates its creation. And this is where we are stuck.”
 
“The best advice that we could give is that, first of all, try to buy your crypto assets with your foreign funds, try to sell them and receive fiat from overseas, try not to use UK-located exchanges, and definitely don’t bring any proceeds in the UK. Where possible, try to identify the issue of the token. These are our best guesses and they haven’t been tested in the courts yet.”

Banking, Bitcoin & Headaches

Banking, Bitcoin & Headaches

The panel agreed that one of the main challenges faced by the crypto world is finding banks that will take in its business.
 
Thomas Jacobsen explained that “to find a bank that accepts the business and you as a client is a great headache. And that’s not something that the government per se can supply. You need to go to the individual private banks and see if they want to service the industry.”
 
Zapol agrees, ascertaining that he has witnessed “numerous examples of people not being able to credit their fiat from the disposal of their assets to their existing banking accounts or they would have to open a new account in a bank that would accept it.”
 
He has had, however, positive experiences with Bank Frick in Liechtenstein and The Pictet Group and Falcon Private Wealth in Switzerland, and “slowly other banks are warming up to the idea, although there are some banks that wouldn't touch it.”
 
Jacobsen does think that eventually “banks will adopt the technology and issue their own coins and blockchain-based forms of transactions,” considering that crypto currencies are “competition for them and why should they service their own competitors.”
 
“My personal feeling is that’s the way we’re going. If Bitcoin becomes a normal way of accepting and making payments, it’s going to be nationalized. I don’t think it’s going to be kept private; I don’t think any government will accept having their own fiat currencies being replaced by a private solution. But that’s more a philosophical discussion,” Jacobsen concluded.

Crypto Currencies: Utility or Security Tokens

Crypto Currencies: Utility or Security Tokens?

Meori Ampeli wrapped up the discussion with a good explanation of the utility vs. security token conundrum.
 
He said: “A security token behaves like a security. When I invest in an ICO, I look for the profits as if it’s a dividend, interest, etc., and I have no expectations for services from the utility for myself. The utility token, at the end of the day, should provide me with some utilities. A service, a product, whatever.”
 
“In most cases, entrepreneurs want to fall under the utility token category. First of all, it sounds more social and you contribute to society. And second, it is more secure from the security authorities, which in most cases classify a utility token as a kind of IPO.”
 
In Israel’s case, he explains, “There is a new circular that says that if you fall under the utility token category, the company has a tax deferral on all the money raised until it provides the service or product…This actually creates a disincentive to move forward since I know that by moving forward I need to pay a tax. However, the circular says that if you do not function, you have to pay tax automatically. And second, by not acting, you lose your reputation and you’re hopefully out of the market. Israel, hence, provides a very certain position for ICOs.”
 
Do you have any follow-up questions for our panelists? Any thoughts on the current state of regulation and taxation of crypto currencies?
 
Drop us a line below!
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