Crypto and Tax in 2021: Be Ready to Pay More
The extension of the Common Reporting Standard to crypto exchanges is expected this year. "Congress might start imposing specific information reporting requirements on exchanges with a US presence." New legislation in India might help the local industry
As some may be aware, there are only two things certain in life, death and taxes, and while crypto was initially able to avoid tax (to varying degrees), it would seem that the taxman is finally catching up with the industry. The US Internal Revenue Service (IRS) introduced a new tax form at the end of 2020 that requires taxpayers to declare whether they’ve acquired or sold crypto in the past tax year, while 2020 also saw the UK’s HMRC begin developing a system to monitor the dealings of crypto traders.
According to a variety of tax experts working within crypto, 2021 will bring an even greater raft of new tax-reporting measures for the industry.
Paying taxes on crypto gains
Niklas Schmidt, a lawyer and tax adviser with the Austria-based Wolf Theiss, predicts that while most tax authorities worldwide continue to lag behind crypto, 2021 will see this situation change significantly.
“The most important crypto-related tax news that we can expect in 2021 is the extension of CRS to crypto exchanges,” he told Cryptonews.com.
CRS stands for Common Reporting Standard and is a system introduced by the Organisation for Economic Co-operation and Development (OECD) to combat tax evasion through the usage of offshore bank accounts.
In other words, crypto exchanges are likely to be required to report on their customers’ gains to their customers’ local tax authorities.
“Basically, if an investor opens a bank account in say Switzerland or Panama, the bank will ask the investor for proof of residency and in particular for his taxpayer identification number. Then, on a yearly basis, the bank will report the amount of interest, dividends, etc. earned by the investor as well as the total holdings to its local tax authority, which in turn will automatically transmit this information to the tax authority of the home country of the investor (which can then check whether the investor filed a correct tax return),” he said.
Schmidt added that the EU began a consultation to extend CRS to crypto exchanges at the end of 2020, while the OECD itself has announced that it will formulate a version of CRS for crypto-assets in 2021.
“If agreement on this were reached (which I believe will happen), then crypto traders using centralized exchanges will have to be aware that their tax office will learn about their crypto holdings. It will no longer be possible to do trades on foreign exchanges and thereby hope that the tax authorities will not learn about these activities,” he said.
United States: "Yes" or "No"
One holdout from CRS is the United States, which presumably feels no obligation to report to its ‘friends’ and ‘allies’ on the activities of customers of American businesses. However, it will nonetheless spend much of 2021 ramping up its efforts to track its own citizens’ dealing with crypto, so that it can ultimately spend more money on bombing other nations.
As reported, the IRS made it a lot harder to pretend you don’t have bitcoin (BTC) or other cryptoassets hidden away somewhere. They altered the standard 1040 form by putting this question on the front page: At any time during 2020, did you sell, receive, send, exchange or otherwise acquire any financial interest in any virtual currency? The taxpayer must check the box "Yes" or "No."
At the same time, the expanding requirements of the IRS might be complemented by recent initiatives from the Financial Crimes Enforcement Network (FinCEN), which recently drew the ire of much of the crypto industry by proposing a new reporting rule for transactions above a certain threshold.
“The new regulations would require banks, cryptocurrency exchanges, money service businesses and some other institutions (financial institutions) to obtain and report the identities of parties engaging in cryptocurrency transactions, including payments involving ‘unhosted wallets,’ if the transaction exceeds USD 3,000,” said international tax lawyer Selva Ozelli.
As tax expert Edward Zollars told Cryptonews.com, the purpose of the IRS’ questions and FinCEN’s probing is simple.
“The reason for those questions is to catch someone who answers ‘No’ where the agency later obtains information that they did, in fact, have such currency that they had received, sold, sent, exchanged, etc. in 2020,” he told Cryptonews.com.
However, it’s still not clear whether these initiatives will be confirmed.
Zollars also suspects there’s a possibility that legislators in the US may forge ahead with new crypto tax requirements, even if the current regime — which requires reporting of income and of capital gains — is clear enough.
“I wouldn't doubt that Congress might start imposing specific information reporting requirements on exchanges with a US presence, but that would take legislation. The taxation of cryptocurrency under US law has been generally outlined by the IRS and while some areas of dispute exist (forks are certainly an interesting area), the basics are fairly straight forward,” he added.
Indian readers may be aware that the Indian Finance Ministry recently proposed instituting an 18% goods and services tax (GST) on crypto trading. It’s not clear whether such a proposal will become law, but the government appears serious about pushing it.
Some have suggested that such a tax would be harmful to the Indian crypto industry, although Sumit Gupta, the co-founder and CEO of India’s major crypto-exchange, CoinDCX, told Cryptonews.com that legislation will ultimately serve to legitimize the industry and help it mature.
“If the GST is levied directly on transaction fees, then it will be similar to equity markets in India. We are welcoming the current step, as the crypto transactions from Indian exchanges will come under specific compliance rules which will be good for the ecosystem in the future,” he said.
Meanwhile, the European Court of Justice ruled in 2015 that trades involving cryptoassets should be exempt from GST (also known as VAT in certain jurisdictions), while nations like Singapore have in fact reversed previous laws where exchanges involving crypto were subject to GST/VAT.
Tracking & taxing
Instead, most nations will spend 2021 focusing on taxing income and capital gains, and on how to ensure that income and capital gains deriving from crypto are more fully tracked. If nothing else, this should be taken as a positive sign, indicating that cryptoassets and crypto trading are becoming more widespread and normalized.
“Cryptocurrencies are becoming mainstream, a new investment class. Accordingly, like other investments, gains from trading cryptocurrencies will be subject to taxation,” said Selva Ozelli.
So yes, enjoy your gains from bitcoin and other cryptos this year, but get ready to send a bigger portion of them to the taxman.
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Find more insights about the crypto trends in our special series Crypto 2021.