In the past few years, the popularity and uses of virtual currencies like Bitcoin, Litecoin, Dogecoin, Peercoin, and Ethereum have increased steadily. Today, cryptocurrency is used widely used as both payment methods and investment instruments. Crypto trading is being done worldwide and is done either for professional reasons or personal interests. Thanks to virtual currencies, a legal vacuum was created that was later filled with regulations.
Different nations’ authorities are continuously making efforts to use the potential of cryptocurrency and blockchain technology profitably. However, they are required to set up some specific rules and regulations. Nations around the world have different policies and regulations when it comes to cryptocurrency taxation. This article will go through the crypto taxation system in the European Union’s countries and the United Kingdom.
Table of Contents
UK Crypto Tax Basics
HMRC (Her Majesty’s Revenue and Customs) is the UK’s tax collecting body; it has started to enforce its UK crypto tax policies more aggressively today. As cryptocurrencies like Bitcoin have started growing in popularity over the years, so has the number of people making money by trading or investing in them. According to the UK crypto tax rules, these proceeds are considered capital gains and are subjected to capital gains taxes.
When it comes to implementing cryptocurrency tax UK, the following elements determine how much you will be taxed:
- Trade frequency
- Losses on crypto to reduce taxable income
- Holding period
From a tax point of view, investing in cryptocurrency is almost similar to investing in other types of assets like real estate, bonds, and stocks. It means that all the rules of capital gains and losses apply when you ‘use’ cryptocurrency like:
- Simply giving away cryptocurrency to another person
- Using cryptocurrency to pay for services/goods
- Exchanging cryptocurrency
- Selling cryptocurrency
If you ‘use’ your cryptocurrency for any of the above, you will be subject to capital gains taxes, similar to other forms of investment.
Taxation cryptocurrencies in Europe
Most European nations approach cryptocurrency regulation in a decentralized manner. For instance, the UK treats Bitcoin like a foreign currency. On the other hand, Bitcoin sales in Germany are not subject to capital gains tax; however, income taxes apply if the investment is being held for less than a year.
You would be surprised to know that even in countries like Switzerland, known as the land of cryptocurrencies, taxes are levied. It means that Swiss residents need to pay wealth, profit, and income taxes on their crypto holdings. Thankfully, all nations under the EU allow cryptocurrency sales are exempt from the VAT. While regulators thought paying taxes is a problem, this extra revenue will make them think twice before banning Bitcoin taxes.
So, what do cryptocurrencies and tax law have in common? These two subjects are poles apart from the worldview perspective. For most, tax laws are a symbol of excessive regulations that are imposed by the government. On the other hand, blockchain technology and cryptocurrency represent a free, unregulated, and decentralized society. The complexity of these two words increases as you attempt to integrate cryptocurrencies into the world of tax codes.
While cryptocurrencies are not considered legal tender in Spain, the country does not have a specific regulatory taxation cryptocurrencies framework. According to Spanish law, cryptocurrency is not considered a financial instrument like derivative, promissory note, etc. It is also not considered a currency; however, they could be assimilated to commodities or chattels (when traded internationally) or securities for public offerings.
The total duration of time you have held your crypto assets will determine and influence your tax on cryptocurrency rate. If you plan to sell cryptocurrencies or use them for long-term investments, you will be subject to capital gains tax, with a rate anywhere between 19% and 23%. The rate goes higher as you cross the €50,000 mark (or $54,594).
If you have losses with the sale of cryptocurrency, you can compensate them with the remaining of the capital gains. If you did not get any profits in that same year, the compensation could be done in the following four years.
Unlike most developed countries globally, Germany does not see cryptocurrency as stocks, commodities, and currencies. Instead, some digital money like Altcoins and Bitcoin is considered as private money. It is quite an important distinction since private sales bring tax benefits to the country.
According to the German, private sales below €600 are exempted from tax. More interestingly, you do not have to pay any tax if you hold your cryptocurrency like Ripple, Ethereum, Litecoin, and Bitcoin for about a year. Even if you sell your crypto assets, you do not have to pay capital gains if you held them for about a year.
The way Germany treats cryptocurrency is good news for crypto fans. However, it still does not answer whether the rules and regulations can create an influx of crypto traders to the nation. Due to the taxes, Germany is considered somewhat of a cryptocurrency haven.
According to French law, it has recently been announced that the tax on cryptocurrency for digital currency traders has been reduced significantly. Hence, all the profits earned from crypto trading are considered commercial and industrial gains. However, this can only be applied to regular income from trading Bitcoin. Involving in occasional transactions that generate gains are considered as non-commercial profits.
Profits derived from cryptocurrency speculation and mining are considered commercial and industrial profiles and are subject to the progressive income tax schedule – 45% of social contributions and marginal profits. As for brands and companies, profits from crypto trading are liable to taxes under the general corporation tax regime for-profit and losses. As of now, the rate of the corporate income tax is 33.33%. By 2022, it has been said that the standard rate will further be reduced by 25%. There are also no specific VAT laws related to cryptocurrencies.
For Italy, there are no specific rules or regulations related to cryptocurrency. However, only individual provisional activities are taxed at 26%. It is because the Tax Authority of Italy considers this to be a speculative activity if the ownership threshold of the cryptocurrency increases to more than €51,000 during the fiscal year. Additionally, crypto traders are also liable to pay taxes on profits as income – this includes non-resident Italians trading in the country via a permanent establishment. As for companies, they are subject to corporation taxes.
Italy does not have any specific rules related to VAT that cover cryptocurrency. Exchanging and purchasing done in Euros (or any other currencies) are considered foreign currency transactions. It means that the transaction margin is exempt from VAT. If you are paying for goods and services in cryptocurrency, you will have to pay the VAT according to the service/supply value. This transaction is in Euros. Italy also does not have any transfer taxes.
Depending on the country and jurisdiction, the regulatory frameworks that govern the taxation of cryptocurrency depends significantly. Overall, the world of cryptocurrency is still growing, and most countries have not even formulated laws on how to tax them. However, the masses are fast adopting cryptocurrency like never before. Nations worldwide need to carefully implement clear and precise guidelines related to crypto-assets and taxation cryptocurrencies.