Taxing Cryptocurrency, the troubles and possibilities

Fredrick Awino
06.07.2022
259 Views

Taxes  collected from individuals and business organizations is no doubt the greatest source of government revenue. This is the case even in the wealthiest nations. Currently, the international financial system which basically involves fiat currency is by and large under full control of governments.

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An institution such as the central bank of  a country executes fiat control of domestic currency of each country. With cryptocurrency claiming autonomy from fiat agencies, the trouble then shifts to how then will governments operate.  

The question of taxing cryptocurrency or even monitoring its provenance is one conundrum that most countries, especially the developing ones are yet to unravel. Today, the USA has set a fully fledged system of cryptocurrency taxation which supports this new wave.

Unlike the United States, countries like Nigeria and Kenya are yet to establish mechanisms for taxing cryptocurrency. The trouble of cryptocurrency taxation in emerging economies is that taxing fiat currency has never been efficient and so the jury is still out on how crypto will pan out. 

To just get an idea about the infrastructure it takes to bring cryptocurrency into full taxation, read here. It is doubtful that this taxation can be easily attainable in nascent economies. Such countries are already dealing with the problem of trust and public goodwill still needs proper panel beating. 

Cryptocurrency, the new investment and payment option in town

For more than a decade now, there has been a radical new way to make payments. As you might have known, the creation of cryptocurrency in 2009 has led to the establishment of the comprehensive set of payments. People across the world have benefitted from the white-hot rise of this evidently burning investment. 

One major issue that has formed part of discussion among the crypto investors, especially the pioneer  cryptocurrency,  Bitcoin is its taxation. Ideally, the majority of the regulatory authorities are pushing for imposition of tax on any income generated on the transactions performed. This is the core of today’s discussion. 

The wide running debate on cryptocurrency taxation 

While it is possible, some financial experts argue that any decision to tax cryptocurrency will require sophisticated technology and a taxation system. Such systems must as a basic be drastically different from the traditional methods of taxing. On the other hand, others also argue that taxation is an opportunity for the government to earn some extra cash as part of its public finance. 

Some countries already  treat cryptocurrency as a property for tax purposes and not as a currency.  In this sense, the tax reporting obligations for this digital currency resembles that of a traditional stock trading. You are likely to incur capital gains and losses on any taxable activity or event.

Although the patchwork on new taxes on income earned with cryptos is on the increase, the nature of the cryptocurrency, their mode of transactions are likely to pose huge challenges to the tax officers. Let’s discuss some of the challenges and opportunities in Cryptocurrency Taxation. 

Challenges to Cryptocurrency Taxation that countries will have to contend with 

Myriads of challenges still emerge as cryptocurrency continues to gain new grounds and excerpt presence in countries that nobody would have imagined. What really keeps government officials scratching their heads is ways to really make sure that they get their Caesar’s share of the growing cryptocurrency cake. It is a legitimate concern especially now that the media is awash with stories of people making great fortunes in crypto investment. Anyway others lose big too. 

Here are just some of the many challenges crypto taxation faces. 

Difficulty in Assigning the Basic Cost of cryptocurrency

In most cases, trading cryptocurrency involves buying and selling it on the cryptocurrency exchanges. A number of exchanges exist. However, we recommend Etoro, Binance and Plus500. You will realize that these exchanges look similar to the stockbroker sites that provide users with the opportunities to invest in stocks. 

As a difference, cryptocurrency exchanges allow users to use digital currencies in all of its transactions. Investors will send and receive cryptocurrency fluidly from the exchange wallets. However, the exchanges do not give out a form needed to report and file income tax for taxation. 

This reporting inability and the complex tracking systems across all major cryptocurrency platforms means that the tax professionals find it difficult to implement taxation on the income earned with cryptocurrency. 

Loss of Access to cryptocurrency Transaction

A traditional taxation process requires certain types of data. Ideally, tax professionals need these data for their uses and in an event that if they are not available, it becomes daunting. Losing transaction data is a common issue among cryptocurrency users. 

In the recent past, a number of exchanges including Cryptopia shut down sue to liquidity or related issues. It’s unsurprising that the majority of users of such exchange companies were left without any historical transaction data. The absence of such data makes taxation difficult. 

Truth be told, the taxmen have little or nothing to do when the clients lose their transaction data. In the same way, if the users have no access to their wallets or do not have their historical records at all complicates things. 

The only possible way to have this data is to encourage clients to keep their data accurately and later submit them to the taxman whenever needed. Otherwise, proper taxing of cryptocurrency may remain a dream not easy to be achieved. 

Challenges with Cryptocurrency Tax Software 

Financial experts generally agree that for a cryptocurrency system to be effective, efficient taxation software is a must have. Ideally, such software can help to automatically link the users’ historical data, cost and the value on each transaction involved in crypto. Taxmen use these tools to extract and compile the information needed. However, the surging number of cryptocurrency exchanges may threaten a proper application and use of such software. Not all taxation systems have same designs which may make it difficult to use them on all the crypto exchanges. 

In the event that tax software is incompatible with any of the platforms, the taxation process cannot be initiatedTax professionals also be needed to manipulate the kind of data collected from exchange platforms. This process has the potential of distorting the accuracy of the collected data. Most crypto exchanges have system and functionalities that limit amount of extractable or exportable data. The chances that the tax preparers get limited data are extremely higher.

Absence of Clear Regulations on cryptocurrency taxation

An effective taxation system needs a well-established financial framework and mechanism to tax. In the absence of such systems, the overall goal of taxation is unachievable. In fact, the regulators must address some of the critical elements involving crypto taxation. Ideally, they are yet to provide information how elements such as airdrops, basis assignment and forks will be addressed from the tax point of view. 

Opportunities in Cryptocurrency Taxation

From the ongoing, it becomes evident that the tax preparers may still find it challenging to tax cryptocurrency income. However, it is important to know that it is just a matter of time until taxing cryptocurrency commences.

A number of regulatory bodies such as the Internal Revenue Source (IRS) still believe that the cryptocurrency market has opened a number of avenues through which it can impose tax on the crypto traders. Some of the events that such regulatory bodies believe are taxable include: 

  1. Making payment for goods or services with Bitcoin profits to purchase assets. 
  2. Exchanging a crypto coin with another. 
  3. The receipt of the mined or forked cryptocurrencies. 
  4. Exchanging the crypto for a fiat currency issued by a government-body. 

This is our final  Final Word on cryptocurrency taxation

The cryptocurrency world is fast evolving and becoming increasingly complex. In fact, even the bureaucrats who take their lives researching about it are unable to figure out this problem. With the above explanations,  imposing  taxation on crypto income require much effort.

It requires a lot of head scratching to actually adjust taxation regimes so a to accommodate crypto. Bet you me, most developing countries will take quite some time to develop responsive taxation systems. This casts dark clouds on whether really such countries will reap their share of taxes.  Until then, let us wait for the regulators to provide information on how elements such as airdrops, basis assignment and forks will be addressed from the tax perspective. 

Author Fredrick Awino