Thursday, April 2, 2020
Home Cryptocurrency Articles Crypto-industry and Taxmen: A Weird Anatidaephobia

Crypto-industry and Taxmen: A Weird Anatidaephobia

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Tax-debates are backhanded compliments for any industry; especially for a new, bizarre and controversial one – they are hints of acknowledgement. You can’t dismiss the existence of a ghost once you stitch a neon-lit robe for it, can you? But does the robe fit?

The word is in the air, outside every window, in almost every country. Somewhere it is accompanied by the word ‘breaks’, somewhere by the adjective ‘confusing’ and at most of the places, by the word ‘unjust’. After all, a word as heavy and as relevant (for every individual and company, mind you) like ‘taxes’ had to have his own coterie of qualifiers. And phobias.

The taxman seems to have popped his/her head again as that duck who stares at you all the time. The fear is building up – in a silly but unshakeable way – for players, enthusiasts, advocates and users in the crypto-industry. Someone is always rubbernecking you – eerily and inexplicably. That’s not a great feeling when you are part of a new and radical industry. But are these ducks really out there? Are they that scary? Are they indeed, ducks?

Let’s start with the USA and the general idea of taxes. The tax season is soon to start in America (as the Internal Revenue Service, or IRS, readies for 2019 tax returns and for a total taxable annual income of around $2.5 trillion – as per the Government Accountability Office’s report), there is another figure that is casting a big shadow here. Lost revenue (at the federal level) from intentional evasion and unintentional errors tots up to $400 billion per year. A quick look at the IRS’s 2018 Comprehensive Taxpayer Attitude Survey tells that 85 per cent of Americans say it is bad to cheat on taxes. But hey, in the 2017 survey, the number was a little up – 88 per cent. Evading taxes is human – a stubborn habit, but also a tendency supported by loopholes and feelings of unfairness.

Now if we start cutting off the edges and zoom in on ‘crypto-taxes’, we see that the scenario is towing the same footprints – most people call these taxes vague, some people want to evade them if they can, some people want to pay but without pulling their hair apart, and the arguments over the ‘just-ness’ of these taxes only keep gathering more steam.

If we turn our heads towards Poland, crypto traders were seen debating over the PCC tax on crypto-currencies. Citizens in Denmark were first surprised, then offended, when exchanges handed over their personally-identifiable information to local tax authorities. Just a Deja Vu of Coinbase and IRS some years back.

Move towards Brazil and we find the tax agency is fiddling with the idea of fining taxpayers who do not disclose crypto-currency transactions. South Korea inched closer to a 20 per cent tax on crypto-transaction income. Japan has been putting crypto in high tax brackets too. That reminds you of the Schedule 1 tax form about ‘virtual currency’ in the USA. Or HMRC (Her Majesty’s Revenue & Customs) in the UK (which is also going to use technology now for strident crypto-intelligence). Questions over tax-liabilities of new categories like airdrops and forks, meanwhile, continue to flummox taxpayers and collectors both. IRS is struggling with that clarity, like many others around the globe.

Tax liabilities and confusion could severely add to the industry’s already-huge list of struggles in gaining mainstream acceptance and ecosystem breadth. Tax havens then, offer some respite and hope. It is good to have places like Portugal, Belarus, Malta, and Singapore etc. Or small transactions exempted in regimes as strict as the USA. And some categories blanketed with leniency in Germany, France, Belgium, United Kingdom, Luxembourg, Switzerland and some European regions.

But the question is for how long?

That should nudge us hard to ask a bigger question. What about people who collect taxes? Are they really unfair, slow and confusing on their own account? Don’t they also have their own ducks to put in a row that keeps shuffling every now and then? Tax interpretation, administrative burden, tax investigation, collection and documentation – they cannot be too easy to handle.

Can there ever be a win-win where taxpayers and collectors can stop seeing each other as sitting ducks? Has the goose been cooked already?

We turn to Anoush Bhasin, Founder, Quagmire Consulting who has garnered a staggering breadth of answers, some enviable clarity and on-fleek advice for crypto-industry denizens and sceptics alike. His sharp observation and interpretation muscles can help to clear a lot of air and doubts. Opening the window now….

Tax evasion was never the idea – Anoush Bhasin, Founder, Quagmire Consulting

Crypto-tax – First of all, do you think it is a paradox of sorts since most countries do not even recognise crypto as a legit currency or money-form? Also, would it dis-incentivise the fluidity of crypto in everyday transactions – and ruin the efforts that the industry is taking in making crypto mainstream?

In most countries, the term “currency” is heavily regulated and its assignment/use restricted to safeguard sovereign control. To this extent, most Regulators are leaning towards categorising crypto as commodities or assets. Naturally, any income earned by buying/selling assets would attract taxes and that is the case with crypto too. Bitcoin was invented to address issues pertaining to censorship, centralisation, monopoly and mutability, However, tax evasion was never intended to be a benefit of this disruption. Rather, it would only take us two steps backwards in the struggle to make crypto mainstream as regulators would have another strong argument in favour of banning it.

What keynotes should we make from the IRS guidance for 2019 or that of HMRC in the UK, if any?

Firstly, regulators showing an open mind-set to understanding and creating a regulatory framework around crypto. Second, crypto’s categorisation as a property or capital asset vis-a-vis a currency. It allows crypto assets the space and time to grow, become mainstream and co-exist with fiat currencies.

Is there a tax-smart, but legal, way to earn crypto or trade in crypto?

That entirely depends on the country in which one lives. While the activity of earning crypto would be legal in most countries, tax rates and exemptions may differ.

Do the tax implications change for various segments of crypto players? Like miners, dabblers, gamers, start-ups, exchanges, airdrop receivers, speculators, serious investors etc.?

Yes, usually different rates of taxes are applicable to different types of income. Broadly, a player can be categorised either as an investor or trader/business. All types of crypto income will then need to be considered in connection to this fundamental categorisation.

What is the scenario of crypto-taxation in India – is crypto under the ambit of property or security?

Any income earned through crypto-assets is legal and taxable. For the purpose of tax law, crypto-assets can be categorised either as capital assets (for investors) or stock-in-trade (for traders).

Any suggestions that Indian tax authorities can look into to extract better and simpler tax compliance here? What tricky areas or complications do you encounter in this space?

Multiple assets, multiple exchanges, multiple time-zones and multiple formats make calculations extremely complicated. For enabling easier tax compliance, it would be ideal if the Tax Authority can provide:

a) DIY guidance on how to compute income from crypto activities; and
b) A separate section with a friendly format in all Tax Returns to disclose crypto income

Should the regular non-crypto industry also get ready for taxation awareness of blockchain assets and other virtual assets that may get strong in the near future?

Anybody entering the crypto space should first educate themselves on regulatory and tax aspects. As this asset class grows in size, we are surely going to see the topic of crypto taxation gain more traction.

Does the decentralised and anonymous nature of data pose a challenge to crypto-taxation or audits? Is Monero easier for tax evasion?

Decentralisation and anonymity cause problems in case of on-chain transactions. Although, income can still be tracked if and when crypto is liquidated to fiat, it is hard to identify and tax on-chain transactions (even harder in case of Monero or Zcash). Tracking becomes much easier when trades are executed on Exchanges since most of them keep detailed records of KYC as well as user trade activity.

What should industry players – that have entered in this domain- be cognizant of? The IRS vs. Coinbase case or the PCC controversy in Poland – what impact have they left on the industry?

Governments will always try and maintain oversight in this space, especially because it allows for a certain degree of anonymity and cross-border capital flows. Rather than playing a game of cat and mouse, a hand-in-hand approach will be significantly beneficial.

Tax evasion would only take us two steps backward in the struggle to make crypto mainstream as regulators would have another strong argument in favor of banning it.

Any recommendation on how should crypto arising from forks be treated?

Simply put, income from forks can be considered investment income (zero cost) for investors and business income for traders.

Do regulators have adequate mechanisms to deal with tax-loss harvesting (crypto-trading losses)?

Most tax laws allow for setting off or carrying forward losses from a source of income, provided that they have been accurately computed and adequately disclosed.

Any take on the emergence of DIY tools for tax calculation and data conciliation like the ones from Lukka or Thomas Reuters?

A number of crypto-tax software are now available in the market. It makes life easier as one can either upload trade reports to their platform or allow their read-only APIs to obtain the data directly from the exchange. My personal favourite is Bear. Tax, as they also support computations as per Indian tax laws.

Last but not least – why the name Quagmire?

Quagmire means a tricky or sticky situation. That is exactly what comes to mind when one thinks of crypto and taxes!

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