Cryptocurrency: how a global phenomenon interacts with national tax rules

Our cryptoassets comparison looks at the tax treatment of transactions in cryptoassets across 14 jurisdictions – UK, France, Germany, Italy, Spain, the Netherlands, Ireland, Austria, Australia, Bulgaria, US, Luxembourg, India and South Africa – addressing some of the main tax questions concerning cryptocurrencies, ICOs and NFTs. From staking, loaning and mining to hard-forks and airdrops or simply using cryptocurrencies for purchasing assets, our analysis provides details of the current position (or identifies the ambiguities) for both individuals and corporates.

The growth of digital or cryptoassets and distributed ledger technology (DLT) over the last decade has been remarkable. It is now estimated that the ‘crypto economy’ has a market value of US$1tn and there are over 10,000 cryptocurrencies in existence. Investors are attracted, in part, by the fact that DLT bypasses the use of conventional intermediaries and financial systems. For example, decentralisation has been posited as a solution to reducing the cost of carrying out transactions through greater efficiency (by reducing administration and the involvement of intermediaries).

These factors have led to an explosion of new and innovative financial products based on DLT, with the “original” cryptocurrencies acting as a precursor to more exotic cryptoassets such as utility tokens, security tokens, non-fungible tokens (NFTs) and stablecoins.

Tax authorities' approach to cryptoassets

The industry continues to develop and evolve, and as the types and features of cryptoassets multiply, so do questions about their correct tax treatment. Tax authorities (and taxpayers) struggle to apply existing tax provisions and rules designed to deal with tangible and intangible assets which are often unsuitable for transactions in cryptoassets.

In addition, the factors that make cryptoassets attractive to investors and businesses are the same factors that make them a challenge for tax authorities. For example, through ‘decentralisation’, cryptoasset transactions can bypass existing financial intermediaries and can therefore bypass existing tax reporting obligations which apply to more conventional financial products. For decentralised products, there are also significant questions over the location and the nature of such products for tax purposes.

As a result, tax authorities are struggling to determine the tax treatment of cryptoassets and transactions in them. There has been a lack of international consensus about how cryptoassets should be treated, leading to variations in the tax implications of ownership and transfers of cryptocurrencies between jurisdictions. However, there is recognition that tax authorities must address these issues now, both to provide certainty for taxpayers but also to deal with the tax risk for governments. The UK, for example, has published extensive guidance on the taxation of transactions in cryptoassets (whilst also leaving significant areas of ambiguity).

Against this background, taxpayers and businesses need to monitor developments across jurisdictions in order to limit their tax risks involved with cryptoassets but also spot opportunities.