Interpreting global encryption asset taxation: Asia moves slowly, with the highest tax rate in Europe reaching 52%

Author: Chloe, PANews

With Trump’s victory in the White House and the entry of cryptocurrency-friendly candidates into the US Congress, the industry is expected to thrive in a favorable regulatory environment, causing Bitcoin to skyrocket to over $90,000. According to a report by CNA on November 18th, Taiwanese lawmakers recently raised concerns about the taxation of cryptocurrency transactions and discussed whether individuals should be taxed on their cryptocurrency transactions.

During the hearing, the ‘legislator’ questioned the tax measures of the ‘Ministry of Finance’ for personal Crypto Assets exchanges, stating that at present, only business tax and profit-seeking enterprise income tax are levied on Crypto Assets exchanges, and there is no clear tax regulation for the profits obtained by individuals or legal persons from transactions. It emphasized that the ‘Ministry of Finance’ in Taiwan should take the initiative to improve the Crypto Assets tax mechanism in Taiwan.

Song Xiuling, the director of the Taxation Agency, pointed out that according to the current tax laws, cryptocurrency is not a currency, but a digital asset trading. As long as there is income from asset trading, it must be taxed. However, because it is self-declared, it requires strengthened verification. The Ministry of Finance will also cooperate with the Financial Supervisory Commission to establish special laws for virtual assets, and there will be new verification measures in the future. ‘Currently, the tax authorities have verification tools that can be used to examine the trading of digital goods and promise to discuss the tax measures related to income from cryptocurrency trading for three months,’ Song Xiuling said.

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

The tax issue of cryptocurrency trading has become the focus of attention in various countries in recent years. PAnews has compiled a simple summary for readers on the tax treatment of encryption assets in various countries/regions around the world.

Global Increase in Transparency of Taxation Information for Encryption Asset Trading

The United States, the European Union, and other regions will gradually impose new tax information reporting requirements on encryption asset brokers and other intermediary institutions by 2023 to increase trading transparency. In June of last year, the Organization for Economic Cooperation and Development (OECD) also released the Cryptocurrency Asset Reporting Framework (CARF) and updated the Common Reporting Standard (CRS) for Financial Institutions, which includes new financial products in the reporting scope.

Countries around the world are gradually implementing tax information reporting for encryption assets to prevent them from becoming tools for tax evasion. According to PwC’s “2024 Global Cryptocurrency Tax Survey Report”, as of December 1, 2023, 54 major cryptocurrency market jurisdictions have indicated that they will quickly introduce the “Cryptocurrency Asset Reporting Framework” (CARF) published by the OECD, and are expected to implement an automatic exchange mechanism for cryptocurrency transaction information before 2027. The transactions that need to be reported include: exchange between cryptocurrency assets, exchange between cryptocurrency assets and fiat currencies, and transfer of cryptocurrency assets with a value exceeding $50,000 for goods or services.

From the Cryptocurrency taxation issue that was questioned by ‘legislators’ in Taiwan recently, it can be seen that the current situation in Taiwan mainly focuses on KYC and Money Laundering prevention. This means that those in the Cryptocurrency industry need to master customer information and actively declare large withdrawals (over 500,000 NTD). In other words, in Taiwan, there is no specific guidance or income tax regulations applicable to Cryptocurrency, except for the Money Laundering Prevention Act.

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

In simple terms, the current principle of cryptocurrency taxation in Taiwan is that ‘profit taking’ is the key factor. As long as investors’ profit funds are not withdrawn to their bank accounts, no actual profit will be generated. Only when cryptocurrency profits are transferred to a bank account, that is, when withdrawals are made and a certain amount is reached, will taxation be imposed.

In addition, for coin merchants whose main business is buying and selling Crypto Assets, if the monthly sales exceed 40,000 New Taiwan Dollars, it is considered as a regular trading coin merchant, and they must complete tax registration and pay business tax and business location 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 the secure distributed ledger of encryption, which is not real legal tender because they are not the coins and paper money of the United States, nor the legal tender issued by any central bank of any country.

In addition, the Internal Revenue Service (IRS) regards Cryptocurrency as taxable property. If the market value of Cryptocurrency changes, and the current price is higher than the value when the investor initially bought it, capital gains or losses will occur when the investor cashes out during the transaction. If there is a profit, the holder must pay taxes for the sold Cryptocurrency. Additionally, if one party receives Cryptocurrency as payment for commercial activities, the recipient of the Cryptocurrency must declare 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 tax on the withdrawal income of $2,000. If the profit from selling the held asset for less than one year is in the U.S. tax year 2023, the tax rate ranges from 0% to 37%, depending on the actual income declared by the party.

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 staking, and interest earned through lending platforms are typically classified as ordinary income and subject to taxation at the general income tax rate. In 2023, the IRS further clarified the recognition timing of staking rewards and defined Non-fungible Tokens as collectibles, making them subject to special tax treatment.

In the middle of this year, the Internal Revenue Service (IRS) of the United States released the final draft of the Cryptocurrency tax system. Starting in 2025, Cryptocurrency brokers will need to submit Form 1099-DA to the IRS to report customer 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, the calculation of taxes varies among states. However, currently, there is no consensus among states on the definition and taxation of Non-fungible Tokens.

Significant tax rate differences among EU countries, with Denmark as high as 52%?

In addition, in some parts of Europe, the EU countries are constantly updating their Cryptocurrency tax systems. If you consider minimizing the tax burden on Crypto Assets, Slovakia, Luxembourg, Bulgaria, Greece, Hungary, or Lithuania would be a relatively friendly choice, as these countries currently have the lowest Interest Rates for Cryptocurrency holders among EU countries.

Compared to the other countries, Denmark, Finland, the Netherlands, Germany, and Ireland are not very friendly towards cryptocurrency transactions. Denmark treats cryptocurrency earnings as personal income and imposes high tax rates ranging from 37% to 52%. The table below shows the types of taxes and tax rates in various EU countries. Among them, Capital Gains Tax mainly applies to taxable investment income, usually at a fixed tax rate, while Personal Income Tax adopts a progressive tax rate system based on the taxpayer’s total income.

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

Finally, in various Asian countries, such as Japan, for individual trading, the income generated by Cryptocurrency exchange is classified as ‘miscellaneous income’ and is subject to progressive tax rates. The tax rate depends on individual income, with the lowest Cryptocurrency tax rate in Japan being 5% and the highest being 45%. For example, the tax rate can be as high as 45% for annual income exceeding 40 million yen (approximately 276,000 US dollars). It is noteworthy that 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 income, and Cryptocurrency does not fall into these categories.

In South Korea, the country plans to impose a 20% Crypto Assets profit tax, applicable to profits exceeding 2.5 million South Korean won (approximately $1,800), but the implementation date has been repeatedly postponed, originally scheduled from 2023 to 2025 and now further extended to 2028. The main reason for the delay is mainly due to market volatility considerations, in the past, there was a lack of appropriate tax infrastructure, and there were concerns that early implementation would affect investor sentiment.

In addition, there is currently no individual capital gains tax in Hong Kong and Singapore. First of all, Hong Kong does not currently have specific tax laws for digital assets, but the Hong Kong Inland Revenue Department updated Interpretation and Practice Notes No. 39 in March 2020, which includes chapters on taxation of digital assets.

However, the guideline does not yet cover stake, Decentralized Finance, Web3 related content (such as Non-fungible Token and tokenization of real assets). However, Hong Kong adopts the territorial tax principle and levies a capital gains tax of 16.5% on the nature of domestic income from operating trade, professional or business in Hong Kong, but does not include capital gains. As for whether the income from Cryptocurrency exchange is of a revenue 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-exempt. However, if an individual engages in frequent cryptocurrency trading or operates cryptocurrency-related businesses, the income may be considered trading income and subject to income tax at the highest progressive tax rate of 22%.

Tax policies of various countries have significantly influenced Cryptocurrency investment strategies, with low tax rates attracting multinational enterprises to invest in those countries. Conversely, high tax rate policies in the United States, Japan, France, and Spain may scare off some investors. According to a Coincub survey, the United States alone could collect approximately $18.7 billion in taxes from Cryptocurrency investments last year.

The situation in European countries is mixed, with some countries providing 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.