Understanding Global Encryption Asset Taxation: Slower Action in Asia, Highest Tax Rate in Europe Reaches 52%

Author: Chloe, PANews

Trump’s re-election and the entry of cryptocurrency-friendly candidates into the US Congress have led to expectations that cryptocurrency will thrive in a favorable regulatory environment, causing the price of BTC to soar above $90,000. According to a report by CNA on November 18th, Taiwanese ‘legislators’ recently raised concerns about the taxation of cryptocurrency transactions in Taiwan, and discussed whether individual cryptocurrency transactions should be taxed.

At the hearing, the legislator questioned the tax measures for individuals’ cryptocurrency exchanges by the Ministry of Finance, stating that currently only business tax and profit-seeking enterprise income tax are levied on cryptocurrency exchanges. There is no clear tax regulation for the profits obtained by individuals or corporations from transactions. It emphasizes that the Ministry of Finance should take the initiative to improve the tax mechanism for encryption in Taiwan.

Currently, there are 26 virtual asset operators in Taiwan that have completed the declaration of compliance with the Money Laundering Prevention Act to the Financial Supervisory Commission. They have all registered for taxation and paid business tax and operating place tax. However, legislators still believe that taxation on cryptocurrency should mainly focus on operators, individual transactions, and audits, and the Ministry of Finance is still not sufficiently mature.

The director of the tax bureau, Song Xiuling, pointed out that according to the current tax laws, Cryptocurrency is not a currency, but belongs to the trading of digital assets. As long as there is income from asset trading, it must be taxed. However, because it is self-declared, it is necessary to strengthen the inspection. The Ministry of Finance will also cooperate with the FSC to establish special laws for virtual assets, and there will be new inspection measures in the future. “At present, the tax authorities have inspection tools to use, to examine the trading of digital goods, and promise to study the taxation methods of Cryptocurrency trading income for 3 months,” Song Xiuling said.

Finally, the Ministry of Finance stated that it will continue to follow the international taxation trends on cryptocurrency and digital service taxes, and adjust the tax system in line with Taiwan’s actual situation in due course.

Taxation issues related to Crypto Assets trading have become a focus of attention in various countries in recent years, and PAnews has briefly summarized the handling of taxation on encryption assets by countries/regions around the world for readers.

Gradually improving the transparency of encryption asset trading tax information globally

The United States, the European Union, and other regions have successively proposed new tax information reporting requirements for encryption asset brokers and other intermediary institutions in 2023, aiming to increase transaction transparency. The Organisation for Economic Co-operation and Development (OECD) also introduced the Common Reporting Standard (CRS) for Financial Institutions last June, which includes the reporting framework for encryption assets (CARF) and updates the reporting scope to cover new types of financial products.

Countries are gradually implementing tax declaration for encryption assets to prevent them from becoming tax avoidance tools. PwC’s “Global Cryptocurrency Tax Survey 2024” pointed out that as of December 1, 2023, 54 major encryption market jurisdictions have expressed their intention to rapidly introduce the “Cryptocurrency Asset Reporting Framework” (CARF) published by the OECD, and are expected to implement an automatic exchange mechanism for encryption asset trading information before 2027. The transactions that need to be declared include: the exchange of encryption assets, the exchange of encryption assets with legal currency, and the transfer of encryption assets for goods or services with a value exceeding 50,000 US dollars.

Looking at the recent cryptocurrency taxation issue raised by lawmakers in Taiwan, the current situation in Taiwan mainly focuses on KYC (Know Your Customer) and Money Laundering prevention. This means that anyone involved in cryptocurrency-related activities needs to collect customer information, and if there is a large withdrawal (over 500,000 New Taiwan Dollars), it must be reported proactively. In other words, apart from the Money Laundering prevention law, there are no clear guidelines or income tax regulations specifically applicable to cryptocurrency in Taiwan.

For general trading users, buying and selling Crypto Assets does not require the payment of trading taxes. Profits are treated the same as profits from other asset transactions (such as forex trading profits), and should be declared as property transaction income and included in individual comprehensive income tax.

Simply put, the current principle of taxing Crypto Assets in Taiwan is that ‘profit-taking’ counts. As long as the investor’s profit funds are not withdrawn to a bank account, there will be no actual profit. Once the Cryptocurrency has a profit transferred to a bank account, it will be taxed only when it is withdrawn and reaches a certain amount.

In addition, for coin merchants whose main business is buying and selling Crypto Assets, if the monthly sales exceed NT$40,000, it is considered as a regular trading coin merchant, and they must complete tax registration and pay business tax and business premises tax.

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

The US government defines Virtual Money as a digital asset that represents any digital value recorded on an encrypted secure distributed ledger. Digital assets are not real legal tender because they are not US coins and banknotes, nor are they the legal tender issued by any central bank of any country.

In addition, the Internal Revenue Service (IRS) considers Cryptocurrency as taxable property. If the market value of Cryptocurrency changes and its current value is higher than the value when the investor initially bought it, the investor will incur capital gains or losses when cashing out in transactions. If there is a profit, the holder must pay taxes for the sold Cryptocurrency. Additionally, if one party receives payment in Cryptocurrency for commercial activities, the receiving party 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 3 months later, according to the short-term capital gains tax rate, Party A must pay taxes on the withdrawal of $2,000. If the profit from selling the held asset for less than one year is considered in the 2023 U.S. tax year, the tax rate ranges from 0% to 37%, depending on the amount of substantial income declared by Party A.

In addition to trading gains, other income in the Cryptocurrency ecosystem also needs to be taxed. For example, Cryptocurrency rewards obtained from Mining activities, rewards obtained from participating in stake, and Interest earned through lending platforms are generally classified as regular income and are subject to taxation at the normal 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 rules.

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

At the state level, each state also has different ways of calculating taxes, but currently, states have not reached a consensus on the definition and taxation of Non-fungible Tokens.

The tax rate varies greatly among EU countries, with Denmark as high as 52%?

In addition, in some parts of Europe, EU countries are constantly updating the Cryptocurrency tax system. If you consider minimizing the tax burden on Cryptocurrency, Slovakia, Luxembourg, Bulgaria, Greece, Hungary, or Lithuania would be more friendly choices. Currently, these countries have the lowest Interest Rate for Cryptocurrency holders among EU countries.

In contrast, Denmark, Finland, the Netherlands, Germany, and Ireland are less friendly to cryptocurrency transactions. Denmark treats cryptocurrency gains as personal income and imposes a high tax rate of 37% to 52%. Below are the tax types and rates for various EU countries. Among them, Capital Gains Tax mainly targets investment income for taxation, usually with a fixed tax rate, while Personal Income Tax adopts a progressive tax rate system related to the taxpayer’s total income.

Hong Kong and Singapore currently do not impose personal capital gains tax

Finally, in Asian countries such as Japan, for individual trading, the income generated by Cryptocurrencyexchange is classified as “miscellaneous income” and is subject to progressive tax rates. The tax rate is based on individual income, and the lowest Cryptocurrency tax rate in Japan is 5%, while the highest is 45%. For example, the tax rate for annual income exceeding 40 million Japanese yen (approximately 276,000 US dollars) can be as high as 45%. Particularly, the Japanese government stipulates that Cryptocurrency losses cannot be deducted from the taxpayer’s income or other assets. Only losses from real estate, business, and forestry income can be deducted from the income, and Cryptocurrency does 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). However, the implementation time has been repeatedly postponed, originally scheduled to be extended from 2023 to 2025, and now it is postponed to 2028. The main reason for the delay is the consideration of market volatility, and a lack of proper tax infrastructure in the past, fearing that premature implementation would affect investor sentiment.

In addition, there is currently no capital gains tax on individuals in Hong Kong and Singapore. First, there is no specific tax law provision for digital assets in Hong Kong, but the Inland Revenue Department of Hong Kong updated the Interpretation and Application of Tax Law (DIPN) No. 39 in March 2020, which includes tax-related chapters on 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 and levies a capital gains tax of 16.5% on the nature of income from operating trade, profession, or business in Hong Kong, excluding capital gains. As for whether Cryptocurrency exchange belongs to the nature of income or capital gains, 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 individuals’ cryptocurrency transactions. Profits from long-term investment in cryptocurrency are tax-exempt. However, if individuals frequently trade cryptocurrency or operate cryptocurrency-related businesses, the income may be treated as trading income and subject to income tax at a maximum progressive tax rate of 22%.

Tax policies of various countries have always significantly influenced cryptocurrency investment strategies, with lower tax rates attracting multinational companies to invest in those countries. Conversely, 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 tax rates on cryptocurrencies in European countries are higher than the global average, reflecting a part of the overall financial system of the European Union.