Interpreting global encryption asset taxation: Asia is slow to act, Europe has the highest tax rate of 52%

Author: Chloe, PANews

After Trump’s reelection to the White House and the entry of cryptocurrency-friendly candidates into the US Congress, it is expected that cryptocurrencies will flourish in a favorable regulatory environment, causing the price of Bitcoin to soar above $90,000. According to a report by CNA on November 18th, Taiwanese legislators recently raised concerns about taxing cryptocurrency transactions in Taiwan, discussing whether individual cryptocurrency transactions should be taxed.

During the inquiry, the ‘legislator’ questioned the ‘Ministry of Finance’ about the tax measures for individuals’ Crypto Assets exchanges, stating that currently only business tax and income tax are levied on Crypto Assets exchanges, and there is no specific tax regulation for the profits obtained by individuals or legal entities from trading. It is emphasized that the Taiwan ‘Ministry of Finance’ should take the initiative to improve Taiwan’s encryption taxation mechanism.

Currently, 26 virtual asset companies in Taiwan have completed the declaration of compliance with the Money Laundering Prevention Act to the Financial Supervisory Commission, and have registered for tax and paid business tax and operating taxes. However, legislators still believe that taxation on cryptocurrency mainly focuses on taxation of businesses, taxation of individual transactions, and auditing. The Ministry of Finance still needs to improve in this regard.

Song Xiuling, Director of the Taxation Department, pointed out that according to current tax laws and regulations, Cryptocurrency is not a currency but a transaction of digital assets. Any income from asset transactions must be taxed. However, because it is self-declared, it needs to be strengthened. Review, the Ministry of Finance will also cooperate with the Financial Supervisory Commission to establish special laws for virtual assets, and there will be new review measures in the future. “At present, the tax department has review tools that can be used to examine the transaction of digital goods and promises to deliberate on the taxation of income from Cryptocurrency transactions for three months,” Song Xiuling said.

Finally, the Ministry of Finance stated that it will continue to follow the international taxation trends on cryptocurrency and digital services tax, and adjust the tax system in a timely manner in conjunction with Taiwan’s actual situation.

Taxation issues related to cryptocurrency trading have become a focus of follow in various countries in recent years. PAnews has summarized for readers the ways in which various countries/regions around the world handle taxation of encryption assets.

Global gradually improving the transparency of taxation information for encryption asset trading

The United States, European Union, and other regions have proposed new tax information reporting requirements for encryption asset brokers and other intermediary institutions starting in 2023, aiming to increase transaction transparency. The Organisation for Economic Co-operation and Development (OECD) launched the Crypto-Asset Reporting Framework (CARF) in June last year and updated the Common Reporting Standard (CRS) for Financial Institutions, including new types of financial products in the reporting scope.

According to PwC’s 2024 Global Encryption Asset Tax Survey Report, as of 1 December 2023, 54 major jurisdictions in the encryption market have indicated that they will quickly adopt the OECD’s Encryption Asset Reporting Framework (CARF), which is expected to be released by 2027 A year ago, an automatic exchange mechanism for asset transaction information was implemented. Notable transactions include: exchanges between encryption assets, exchanges between encryption assets and fiat currencies, and transfers of encryption assets worth more than $50,000 for goods or services.

Looking at the recent questioning of the taxation of Cryptocurrency in Taiwan by the “Legislative Yuan”, the current situation in Taiwan mainly focuses on KYC and Money Laundering prevention. This means that practitioners in the Cryptocurrency industry need to have access to customer information. When there is a large withdrawal (over 500,000 NTD), it must be reported proactively. In Taiwan, apart from the Money Laundering Prevention Act, there is no clear guidance or income tax regulations specifically applicable to Cryptocurrency.

For general trading users, buying and selling Cryptocurrency does not require payment of transaction taxes. Profits are treated as gains from other asset transactions (such as gains from forex trading) and must be reported as income from property transactions and included in personal comprehensive income tax.

To put it simply, the current Cryptocurrency taxation principle in Taiwan is that “profit exit” counts, as long as the investor’s profit funds are not withdrawn to the bank account, no actual profit will be generated. Once the Cryptocurrency has a profit remitted to the bank account, that is, the withdrawal and a certain amount is reached, it will be taxed.

In addition, coin dealers whose main business is the buying and selling of Crypto Assets, if their monthly sales exceed NT$40,000, are considered regular trading coin dealers and must complete tax registration and pay business tax and business premises tax.

The United States considers Cryptocurrency as taxable property, and the calculation methods for state taxes vary.

The US government defines Virtual Money as any digital value representation recorded on a secure, decentralized ledger of encryption, which is not real legal tender because they are not US coins and paper money, nor are they legal tender issued by any central bank of any country.

In addition, the Internal Revenue Service (IRS) of the United States considers Cryptocurrency as taxable property. If the market value of Cryptocurrency changes and its current value is higher than the value at which investors initially bought it, investors will generate capital gains or losses when they cash out in transactions. If there are profits, the holder must pay taxes for the sold Cryptocurrency. Additionally, if one party receives Cryptocurrency as payment from another party for business activities, the recipient in Canadian currency must treat it as business income and pay taxes.

For example, if Party A purchases 1 BTC at a price of $5,000 and sells it for $7,000 after 3 months, according to the short-term capital gains tax rate, Party A must pay taxes on the withdrawal profit of $2,000. If the profit from selling the holding asset for less than one year is considered in the US tax year 2023, the tax rate ranges from 0% to 37%, depending on the amount of actual income declared by Party A.

In addition to trading profits, other income in the cryptocurrency ecosystem is also subject to taxation. For example, cryptocurrency rewards obtained from mining activities, rewards obtained from stake participation, and interest earned through lending platforms are usually categorized as regular income and subject to taxation at the general income tax rate. In 2023, the IRS further clarified the timing of income recognition for stake rewards and defined non-fungible tokens as collectibles, making them subject to special tax treatment.

In mid-2021, the Internal Revenue Service (IRS) of the United States announced the final draft of the Cryptocurrency Tax System. Starting in 2025, Cryptocurrency brokers will be required to submit Form 1099-DA to the IRS to report client transaction information. This new system is expected to significantly improve tax compliance and also bring more compliance requirements for market participants.

At the state level, different states also have different ways of calculating taxes. However, currently, there is no consensus among states on the definition and taxation of Non-fungible Tokens (NFTs).

EU countries have significant differences in tax rates, with Denmark as high as 52%?

In addition, in parts of Europe, the EU countries are constantly updating the Cryptocurrency tax system. If considering minimizing the tax burden on Cryptocurrency, Slovakia, Luxembourg, Bulgaria, Greece, Hungary, or Lithuania would be a more friendly choice, as these countries currently have the lowest Intrerest Rate for Cryptocurrency holders among EU countries.

Compared to Denmark, Finland, the Netherlands, Germany, and Ireland, they are not very friendly to cryptocurrency transactions. Denmark treats cryptocurrency income as personal income and levies a high tax rate of 37% to 52%. The following are the tax types and rates of EU countries. Among them, Capital Gains Tax mainly taxes investment income and usually has a fixed tax rate, while Personal Income Tax adopts a progressive tax rate system, which is related to the taxpayer’s total income.

Currently, Hong Kong and Singapore do not tax individuals’ capital gains.

Finally, in Asian countries, such as Japan, for individual transactions, the income generated by Crypto Assets exchanges is classified as ‘miscellaneous income’ and is subject to progressive income tax rates. The tax rate is based on individual income, and the lowest tax rate for Crypto Assets in Japan is 5%, while the highest is 45%. For example, the tax rate can reach 45% for annual income exceeding 40 million Japanese yen (approximately 276,000 US dollars). It is worth noting that the Japanese government stipulates that Crypto Assets losses cannot be deducted from taxpayers’ income or other assets. Only losses from real estate, business, and forestry income can be deducted from income, and Crypto Assets do not fall into these categories.

In South Korea, the country plans to impose a 20% Cryptocurrency profit tax, applicable to profits exceeding 2.5 million Korean won (approximately $1,800), but the implementation has been repeatedly postponed. Originally scheduled for after 2023, it was postponed to 2025, and now it is postponed again to 2028. The reason for the delay is mainly due to market volatility. In the past, there was a lack of appropriate tax infrastructure, and there was a concern that early implementation would affect investor sentiment.

In addition, there is currently no capital gains tax on individuals in Hong Kong and Singapore. Firstly, Hong Kong does not have specific tax legislation for digital assets, but the Hong Kong Inland Revenue Department updated the Departmental Interpretation and Practice Notes (DIPN) No. 39 in March 2020, which includes chapters on taxation of digital assets.

However, the guidelines do not yet cover stake, Decentralized Finance, Web3 related content (such as Non-fungible Token and tokenization of real assets). However, Hong Kong adopts a territorial tax principle, imposing a capital gains tax of 16.5% on domestic income profits derived from operating trade, profession, or business in Hong Kong, but excluding capital profits. As for whether the gains from Cryptocurrency exchange belong to income nature or capital nature, it needs to be determined based on specific facts and circumstances.

The Inland Revenue Authority of Singapore (IRAS) does not impose capital gains tax on individual cryptocurrency transactions. Profits from long-term investments in cryptocurrency are tax-free. However, if an individual frequently trades cryptocurrency or operates cryptocurrency-related businesses, the income may be treated as trading income and subject to income tax at a progressive tax rate of up to 22%.

Tax policies of various countries have always had a significant impact on cryptocurrency investment strategies, with low tax rates attracting multinational companies to invest in those countries. In contrast, high-tax policies in countries like the United States, Japan, France, and Spain may scare away some investors. According to a Coincub survey, the United States alone collected approximately 1.87 billion dollars in taxes from cryptocurrencies last year.

The situation in European countries is mixed. Some countries provide favorable conditions for long-term holders, while others maintain high tax rates, which may affect investors’ behavior. However, overall, the cryptocurrency tax rates in European countries are higher than the global average, reflecting a part of the overall financial system of the European Union.