Are you looking for ample information on what’s being done in Europe (and Israel) with regards to the taxation and regulation of cryptocurrencies?
Find below the full transcript for our August webinar, which answered eight questions on Bitcoin and crypto assets and generated plenty of food for thought on the future of these technologies.
We want to personally thank Dmitry Zapol, Thomas Jacobsen, Anna Tsabari, Nikola Korbar and Charis Savvides for taking the time to cover our members’ questions and engage in a lively discussion on what’s one of the hottest tax-related topics out there.
DOWNLOAD THE TRANSCRIPT HERE
If you have any follow-up questions for our panelists, please make sure to submit them below.
SUBMIT FOLLOW-UP QUESTIONS
And don’t forget we will reprise this discussion at our inaugural international tax conference in Cyprus!
For now, here are some of the webinar’s main highlights.
How does your jurisdiction classify cryptocurrency and how does your jurisdictions' tax authority treat cryptocurrencies today?
“The Israeli Tax Authority determined that cryptocurrencies are an asset and could not be treated as a means of payment or securities… A business test, according to Israeli case law, examines the nature of the asset, its business frequency, holding period, the taxpayer's knowledge, the mechanism, development and improvement of the asset, its volume of activity and overall circumstances. But we all understand that these commercial tests are not compatible with today's digital reality and the crypto-industry. In light of this, we're faced with the situation in which most crypto-players may be classified as conducting business activity and exposed to 60 percent tax.”
“I guess the favorite lawyer's answer is it depends. For the purposes of the Virtual Financial Assets Act, cryptocurrencies are defined as Distributed Ledger Technology assets. DLT assets include virtual tokens, virtual financial assets, electronic money, and financial instruments that are dependent on or that utilizes distributed ledger technology… If you go to the tax element of how do we deal with cryptocurrencies when it comes to VAT or income tax, then it depends on the use or the reason, for example, issuing or what you're issuing. So we don't really have any prescriptive rules when it comes to taxation, but we look at the European Central Bank statement in 2012, with regards to Bitcoin, which defined Bitcoin as a virtual currency scheme.”
“In the UK, we have one brief issued by HMRC back in 2014 and also some official explanation of how cryptocurrencies are treated from the capital gains tax point of view. Practically speaking, the UK follows the general trend with regards to VAT that most Bitcoin and cryptocurrency transactions do not cause any VAT consequences. And, with regards to using such assets in the business activities of companies and individuals, HMRC widely says that whether any profit or gain is chargeable or any loss is allowable will be looked at on a case-by-case basis, taking into account their specific facts… What can be said is that normally such assets are treated as assets and not as currency, and any income loss is calculated by reference to the Pound sterling.”
When you are selling a crypto asset, where is it located? And, secondly, are receipts from the selling of a crypto asset income or capital?
“There is no uniform way of defining territoriality. My personal understanding of this is that we need to pay attention to a number of details with regards to the transaction itself, where the sale actually takes place, whether it's on an exchange platform or from one wallet to another wallet… At the end of the day, I understand that you will be either taxed as a person of the country where you're a tax resident or, if you are a company, the country where this money appears as income… I'm not saying that this is the right way of approach because if we make the scenario a little bit complicated and we have transactions if you’re resident of one country, tax resident of another country, the same takes place from your crypto wallet, the server is in country X, then you sell to country Z. You know, all these complications in terms of internationalization.”
Which jurisdiction is home to the most crypto-friendly banks?
“I think that one important thing that has to be emphasized here is risk analysis. When banks generally look into a certain asset or currency... they also analyze the risks of accepting that. Now, we have seen that cryptocurrencies have proven to be one of the riskiest assets in the world; I think 80% or more of the cryptocurrencies have declined in value by approximately 80% to 90%, some even more. So if you are a bank and you accept deposits or any other form of business with cryptocurrency, and then you face the risk of this sort of price crash—which we have seen since January—I don't see banks accepting it even if the regulations are all clear.”
“Individuals who want to deposit their fiat from their disposals of cryptocurrencies face problems from the banks, which want to confirm that the initial funds to acquire the assets were acquired in proper ways. And some banks wouldn't touch such money with a pole. However, other banks mostly located in London and also in Switzerland would not have an issue with it. But there is really no uniform quality regarding the acceptance of cash from the realization of Bitcoin… The situation is quite difficult when someone comes to us and asks us to help them open a bank account in the UK, we'll say, ‘You will have much better luck doing it outside the UK.’”
Why is selling a cryptocurrency to buy another one not a taxable event?
“In Israel, we have a tax authority position on this regard. Because the tax authority had to define the crypto as an asset, it concluded that in any case where one crypto coin is converted into another—Bitcoin, Ethereum, Litecoin, or Dash, for example—without going to fiat, the tax event accrues and capital gain tax has to be imposed on it. According to this position and Israeli law, every time a trader exchanges one digital coin for another, they are required to report it and pay tax within 30 days. That is impossible… So we disagree with this written position and we think that up until the time the taxpayer exchanges his digital coin to fiat, the digital coins they held were not considered an asset. Only after they exchanged it to fiat, there is a tax event that must be reported and one has to pay tax for it. Or, alternatively, we believe that in the case of cryptocurrency, a special provision of reporting on a semi-annual or an annual basis has to be applied similar to that in the securities field in Israel.”
“I'm not sure that it is the case when you have a trading situation that you only take the point where you come back into fiat as the sort of taxable event. I know that in, for example, the US, you would need to look at every single transaction even when you're transferring one crypto to another and to look at exchange rates there and then. I know that, for example, if you were trading in currencies you would have to recognize trades as and when they happen with the exchange rates as of that time. So, I'm not 100% sure that you can say that there isn't a taxable event if you're in a trading situation when you convert one crypto to another. There is no guidance. There is no written sort of justifications or anything from the Maltese Tax Authorities in this regard. But I have a sneaking suspicion that they would want to see every transaction accounted for with a conversion rate into Euro, which is our currency. Or if you're trading in the name of a company, in the currency of that particular company as this sort of recording event when it comes to taxation.”
What is your forecast for Bitcoin and blockchain and the taxation and regulation of cryptocurrencies, either in general or in your jurisdiction?
“I think that cryptocurrency will have stricter regulations than the blockchain because blockchain can be considered an operating system… I don’t think that there is a law that forbids your company to upgrade your technology onto the blockchain. I don't think that there will be a lot of strict regulations as compared to those, for example, for Bitcoin and other coins. I think cryptocurrency adoption will be challenged a little bit due to price fluctuations. But, in the long run, I think that we are like five to ten years away from, more or less, a general cryptocurrency adoption. For example, like the cellphones were in the early 2000s compared to now, I think that we are at that point with cryptocurrencies.”
“In Cyprus, we are still at the stage where we are trying to understand how the blockchain operates and what are digital currencies… All stakeholders have been invited by the Parliament to start looking deeper into how to legislate this issue. We pretty much follow circulars, warnings issued by the European regulators, and we simply repeat them in Cyprus… Obviously, we are looking closely to what's going on around the world. Malta is, of course, an example, a case study for us, so we will look closely to what happens there. And hopefully we will have a much clearer view of the situation and where things are going and how the legislator intends to intervene in this area next year.”