A few years ago blockchain technology and digital currencies seemed like a futuristic fantasy that sounded good in theory but had no practical value in real life.
Boy, have times changed! As more and more cryptocurrencies are being accepted by the mainstream populous and businesses around the world, the value of digital tokens like Bitcoin and Ethereum, have created fortunes for those who got in early and stuck with them.
While the current debate regarding regulating cryptocurrencies is still going on across the globe, more and more confidence is growing towards the future of digital currencies and blockchain technology as a whole.
That being said, it is important to stay on current with the latest tax implications of buying and selling cryptocurrencies so you or your business does not get hammered by the recent and ever-changing tax cryptocurrency tax laws.
Tax Laws Across The Globe
Not every country has the same tax requirements for the buying and selling of cryptocurrencies, and while it may seem that it would only be important to understand the tax laws governing cryptocurrencies within your country, if you are trading digital tokens through exchanges located in other parts of the world, you should at least know some of the basic tax rules governing digital currency within that country lest you be slapped with a penalty or banned from trading in that part of the world ever again.
The following are the current tax regulations governing the buying, selling and exchanging of digital currencies within North America, the EU, and the United Kingdom.
America & Canada
Let us start with North America first. In the U.S., the IRS treats digital currencies as property and so taxes digital coins as so. Basically, anyone or any entity buying, selling, or exchanging digital tokens will have to pay capital gains tax on any profit made.
Canada also demands a capital gains tax from the trading of digital currencies within its borders as it regards cryptocurrencies to be a commodity and not a legal-tender (a.k.a. Government Currency).
U.K. & EU
Before 2014, the United Kingdom regarded cryptocurrencies as currency and property and subjected them to both VAT and property taxes. However, after the EU ruled that cryptocurrencies were to be considered currencies and not property, the U.K. followed suit and now both U.K. and EU apply VAT taxes to the buying and selling of goods and services through digital currencies.
The U.K. and EU’s cryptocurrency tax laws also apply to the exchanging or trading of one digital currency for another. In either case, a VAT tax is automatically applied to each transaction whether it is a trade, exchange, purchase, or sale involving cryptocurrencies.
Avoid A Cryptocurrency Tax Audit
In the recent Coinbase, Inc case, the IRS proved that it is more than capable of tracking down U.S. citizens trading cryptocurrencies with offshore accounts in hopes of evading the country’s tax laws. This being the case.
To date, the IRS has collected over $10 billion in unclaimed digital currency offshore accounts and is likely to continue this into the future as the value, popularity, and practicality of cryptocurrencies continue to rise.
What does this mean? If the IRS can locate your digital coin transactions being made in another country, then they most certainly can do so within the United States borders as well.
Whether you are trading cryptocurrencies within the U.S. or abroad, it is important to document every transaction so that you can avoid audit penalties from the IRS.
Some of the most important areas to consider when documenting your transactions include the following:
Establish Your Cost Basis
Report Any Income From Mined Digital Coins
Track & Report Any Purchases Made Through Digital Tokens
Report All Cryptocurrency Exchanges (Trading One Digital Coin For Another)
Report Payments Made To Employees With Digital Currencies
Report Any Gifts Made With Digital Currencies