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Taxes and Taxation
Reference:

Foreign experience in legal regulation of cryptocurrency taxation

Andrianova Natalia Gennadievna

PhD in Law

Researcher at the Department of Administrative Law and Administrative Process of the Institute of State and Law of the Russian Academy of Sciences

119019, Russia, Moscow, Znamenka str., 10

natalia.g.andrianova@gmail.com
Other publications by this author
 

 

DOI:

10.7256/2454-065X.2023.3.43417

EDN:

HEPRHI

Received:

19-06-2023


Published:

26-06-2023


Abstract: The active development and distribution of cryptocurrencies around the world raises a natural question about the need to determine the procedure for legal regulation of taxation of transactions with cryptocurrencies. In this article, on the basis of the comparative legal method, the author examines the experience of legal regulation of cryptocurrencies and the procedure for their taxation in foreign countries. As part of the study, the experience of the United States of America, Singapore, New Zealand, Iran in terms of the legal regulation of cryptocurrencies and the procedure for their taxation is analyzed. It has been established that each of the above-mentioned states adheres to its own special approach in terms of regulation and taxation of cryptocurrencies. As a result of the study, three main models of legal regulation and taxation of cryptocurrencies in foreign jurisdictions were identified: the first approach is based on the recognition of cryptocurrencies as a type of convertible virtual currency that can be used as a means of payment. At the same time, in this approach, for tax purposes, cryptocurrencies are considered as property; under the second approach, cryptocurrencies are not recognized as legal tender. In the second approach, cryptocurrencies are treated as property for tax purposes; the third approach is based on a complete ban on the use of cryptocurrencies in the state, taxation of transactions with cryptocurrencies is not established.


Keywords:

cryptocurrencies, legal regulation, Foreign experience, the essence of cryptocurrencies, the use of cryptocurrencies, digital currency, taxation, income, capital gains, tax

This article is automatically translated.

With the development of human society and, in particular, markets, there was a need for more advanced exchange tools. In this regard, the introduction of cryptocurrencies has revolutionized the international payment system in sizes that were unimaginable just a few years ago [1]. The rapid spread of cryptocurrencies around the world since 2009 [2] raises a legitimate question about the need for legal regulation of the taxation of transactions with cryptocurrencies. The problems of determining the tax and legal consequences of transactions with cryptocurrencies are the main ones in the digital economy [3,4,5].

The nature of the taxation rules for cryptocurrencies may vary significantly in different states and will mainly depend on the approach of the state in relation to the legal regulation of cryptocurrencies as such on the territory of the relevant state [6,7]. Next, different models of legal regulation and taxation of cryptocurrencies in foreign countries will be analyzed.

USA. The US Tax Service classifies cryptocurrencies as a type of digital assets. Digital assets are broadly defined as any digital representation of value that is registered in a cryptographically secure technological system [8]. Digital assets are not a fiat currency, since they are not presented in the form of coins or banknotes of the United States or another state and are not issued digitally by the central bank of the state. A digital asset that has an equivalent value in the national currency or acts as an analogue of the national currency is called a convertible virtual currency. Cryptocurrency, according to the US Tax Service, is an example of a convertible virtual currency that can be used as a means of payment for goods and services, carry out digital trade between users and exchange for national currencies of states or digital assets. For federal taxation purposes, digital assets are treated as property. The general principles of taxation applicable to property transactions also apply to transactions with digital assets. Transactions with digital assets, as a rule, are subject to reflection in the tax return. A taxpayer's taxable profit or loss may arise as a result of the following transactions: sale of a digital asset for fiat money; exchange of digital assets for property, goods or services; exchange of digital assets or their purchase/ sale; receipt of a digital asset as payment for goods or services; receipt of a new digital asset as a result of mining.

Thus, in the United States, cryptocurrencies are recognized as a kind of convertible virtual currency that can be used as a means of payment. At the same time, for the purposes of federal taxation, digital assets are considered as property.

Singapore. Cryptocurrencies are not legal tender in Singapore. The Singapore Tax Authority (IRAS) classifies cryptocurrencies as digital payment tokens [9]. Profits earned from long-term investments in cryptocurrencies or capital gains are not taxed. The payment token serves as a payment method, but is not a fiat currency, since it is not issued by an authorized state body and is not a legal tender. For income tax purposes, IRAS considers a payment token as intangible property, since it represents a set of rights and obligations and has no physical form. Therefore, transactions involving the use of payment tokens as payment for goods or services are considered as barter trading. If an organization receives payment tokens for the goods or services provided to them, such an organization will be taxed on the cost of the basic goods/services provided.

Thus, in Singapore, cryptocurrencies are considered as digital payment tokens, which serve as a payment method, but are not a fiat currency. Transactions with cryptocurrencies are subject to taxation.

New Zealand. There are no separate special regulatory legal acts regulating cryptocurrencies in New Zealand. Belated explanations of how regulators will treat cryptocurrencies within the existing legal framework have caused some confusion and uncertainty[10]. The High Court of New Zealand has established that cryptocurrencies are property [11]. The fundamental difference from fiat currency is that cryptocurrencies are not controlled by any government agency. Distributed transaction registries and rules established by consensus between the participants of the relevant infrastructure are the key characteristics of cryptocurrencies. The main features of crypto assets are:

· their impalpability;  

· using blockchain technology;

· decentralization; 

· the rules are established by consensus between the participants of the relevant infrastructure.

The court's decision was based on the definition of "property" in accordance with New Zealand law.  Property is property of any kind, tangible or intangible, real or personal, tangible or intangible, which includes rights, interests and claims of any kind in relation to property, regardless of how they arise. The court ruled that the cryptocurrency corresponds to four key characteristics of property [12]:

1. A precisely defined object. Machine-readable strings of cryptocurrency symbols are sufficiently distinguishable that they can be uniquely identified by the owner of an account on a particular network.

2. Identification by third parties. A combination of the account owner's public key (a code that allows the user to receive cryptocurrencies to his account) and a private key (a second code available only to the account owner) together with the requirement that both of these keys are required to record the transfer of cryptocurrencies, it means that cryptocurrencies are sufficiently identified by third parties.

3. The possibility of obtaining by third parties. Cryptocurrency can be purchased by third parties.

4. Some degree of constancy or stability. The blockchain keeps public records of cryptocurrency units, because of this, the cryptocurrency retains some degree of constancy or stability.

Cryptocurrency in New Zealand is not considered a means of payment. The Department of Internal Revenue considers cryptocurrency as property for tax purposes. Any profits and losses received from transactions with cryptocurrencies will, as a rule, be taxed. Crypto exchanges transmit information about cryptocurrency transactions of an individual to the tax authorities. The purchase and sale of crypto assets is also subject to taxation.

Thus, cryptocurrencies are not recognized as a means of payment in New Zealand. For tax purposes, cryptocurrencies are treated as property. Transactions with cryptocurrencies are subject to taxation.

Iran. A law has been passed in Iran that prohibits the use of cryptocurrency as a legal means of payment. The government and the banking system will not consider digital coins as legal tender, and the central bank of Iran will not guarantee their value [13]. At the same time, the Iranian government has allowed cryptocurrency mining as an industrial activity upon obtaining a permit and compliance with the established requirements [14].

Thus, there are three main models of legal regulation and taxation of cryptocurrencies:

1) cryptocurrencies are recognized as a kind of convertible virtual currency that can be used as a means of payment. For tax purposes, cryptocurrencies are treated as property;

2) cryptocurrencies are not recognized as a legal means of payment. For tax purposes, cryptocurrencies are treated as property/property.

3) a complete ban on the use of cryptocurrencies, taxation of transactions with cryptocurrencies has not been established.

References
1. Salman, A;Razzaq, M.G.A. (2019).Blockchain and Cryptocurrencies;IntechOpen: London, UK, 26.
2. Nakamoto, S. (2008).Bitcoin: A peer-to-peer electronic cash system.Bitcoin Whitepaper, 1-9.
3. Kucherov, I.I. (2019). Actualissues of tax and legal regulation of the digital economy. In Legal science and practice. Bulletin of the Nizhny Novgorod Academy of the Ministry of Internal Affairs of Russia, 4, 167-175.
4. Khavanova, I.A. (2017). Tax Rules for Bitcoin: Approaches of Russia and Other Countries, 7, 68-76.
5. Efremova, E. (2018). Operations with cryptocurrencies: prospects for taxation today and tomorrow. In Taxation, accounting and reporting in a commercial bank, 2, 42- 50.
6. Prokaev, M. V. (2020). Cryptocurrency as a subject of taxation. In Taxes, 6, 26-30.
7. Konovalov, R.V. (2022). Taxation of Cryptocurrency: Scenarios, Conceptual Issues and Solutions, 3, 8 - 10.
8. IRS Digital Assets. Retrieved from: https://www.irs.gov/businesses/small-businesses-self-employed/digital-asset.
9. Income Tax Treatment of Digital Tokens. Retrieved from: https://www.iras.gov.sg/media/docs/default-source/e-tax/etaxguide_cit_income-tax-treatment-of-digital-tokens_091020.pdf?sfvrsn=91dbe1f7_0
10. Sims, A., Kariyawasam, K., Mayes, D. (2018) Regulating Cryptocurrencies in New Zealand, 79.
11. Ruscoe v Cryptopia Limited (in liquidation) CIV-2019-409-000544 [2020] NZHC 728
12. Lord Wilberforce's decision in National Provincial Bank Ltd v Ainsworth [1965] AC 1175 (HL) at 1247–1248
13. New Iranian Law: Government Will Not Recognize Crypto-Related Trade. Retrieved from: https://cointelegraph.com/news/new-iranian-law-government-will-not-recognize-crypto-related-trade
14. Iranian Gov’t Authorizes Cryptocurrency Mining as Industrial Activity. Retrieved from: https://cointelegraph.com/news/iranian-govt-authorizes-cryptocurrency-mining-as-industrial-activity

Peer Review

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Subject of research: The article touches on an important topic of legal regulation and taxation of cryptocurrencies in various jurisdictions such as the United States, Singapore, New Zealand and Iran. The choice of jurisdictions is due to the fact that this is how legal systems have made fundamental decisions on taxation of transactions with cryptocurrencies. Research methodology: The author uses the formal legal method and the comparative legal method to review and analyze existing approaches to the regulation and taxation of cryptocurrencies. The methodology was chosen successfully, taking into account the specific subject-object area. Relevance: The topic is extremely relevant, given the current growth and development of cryptocurrency markets and regulatory issues associated with this new type of asset. At the same time, if horizontal relations regarding the types of cryptocurrencies mediate and regulate the market, then with regard to vertical relations, immediate regulation is required in order to avoid large taxpayers from taxation to the detriment of the interests of the whole society. Scientific novelty: The article contributes to the understanding of the international context of taxation and regulation of cryptocurrencies, identifying various approaches and methods used in different countries. The most valuable are the final conclusions that systematize the experience accumulated in foreign jurisdictions into several models, the choice of which will be the task of the legislator in the very near future. Style, structure, content: The article is well structured, and its content is consistent with the title and the subject of the study. The style is professional and easy to read. It should be noted that the author skillfully balances between an excess of legal and economic terms, which, in the opinion of the reviewer, is rarely achieved by specialists in the field of taxation. The content of the article corresponds to the principle of completeness. In addition, the author does not limit himself to published laws and statutes, but also examines the case law of the Supreme Court of New Zealand. It is impossible not to say that the article is interesting to read, and the information presented is well remembered. Bibliography: The bibliography is extensive and includes both foreign and Russian literature. Sources include academic papers, legal documents and online resources, which allows the author to provide a broad research context. The saturation of the work with sources meets the highest scientific requirements, although the article also has great practical significance. Appeal to opponents: The author uses factual data and legal analysis to back up his arguments, which allows him to effectively appeal to opponents. Conclusions, the interest of the readership: The article is of considerable interest to a wide range of readers, including lawyers, economists, tax consultants and anyone interested in the topic of cryptocurrencies and their taxation. The author's conclusions are justified and give readers a transparent understanding of existing approaches to taxation and regulation of cryptocurrencies.