Binance Tax Watch: Crypto Tax Developments in April and May 2023
Main Takeaways
The new edition of Binance Tax Watch focuses on global advances in tax law and policy in April and May 2023.
Simultaneously with adopting the landmark MiCA framework for digital assets, the EU extended the scope of mandatory tax-related information exchange to include digital assets. Over in the US, a proposed crypto mining tax was dropped from the final version of the debt ceiling agreement.
In April and May, crypto regulation continued to advance around the world – and in many jurisdictions, rules related to tax treatment of digital assets and various crypto-related activities were part of this momentum.
In this issue of Binance Tax Watch – a blog series designed to help Binance users and the wider crypto community to stay on top of the latest digital asset tax developments – we look into new information-sharing requirements in the EU, a slew of federal and state-level initiatives in the United States, the International Monetary Fund’s view of the role of AML frameworks in combating tax evasion, and much more.
EU: European Council adopts MiCA and reaches agreement on DAC8
On May 16, 2023, the Economic and Financial Council (ECOFIN) of the Council of the European Union agreed on amendments to the draft Directive on Administrative Cooperation (DAC8), which extends the scope of mandatory automatic information exchange to include cryptoassets.
The European Parliament will now vote on its opinion on the DAC8 proposal, first on a committee and then plenary level, the latter vote scheduled for July 10. This will clear the way for the adoption of the proposal. It is important to note that Parliament only has the power to issue advice on tax matters. EU Member States have the final say over the legislative text.
In June, the Markets in Cryptoassets (MiCA) framework, which regulates cryptoasset issuers and service providers was published in the official journal in the EU. The rules will apply from 2025.
In parallel, the EU also published rules requiring cryptoasset service providers to collect and share information on sender and beneficiary for traceability and anti-money laundering compliance. The Transfer of Funds Regulation implements the so-called Travel Rule in the EU.
UK: Government launches consultation on DeFi lending and staking
His Majesty's Revenue and Customs (HMRC), the tax authority of the UK, launched a two months-long public consultation into the taxation of decentralized finance (DeFi) involving the lending and staking of cryptoassets.
The consultation follows a 2022 call for evidence and sets out a proposed framework that would, subject to certain conditions, disregard for capital gains tax purposes the transfer of cryptotokens to and from DeFi staking and lending protocols. This would be consistent with the approach already in force for certain types of traditional finance transactions, specifically stock lending and so-called "repos", which share similar economic features with these DeFi transactions.
Kenya: Proposed digital asset tax on crypto transactions
On April 28, the Kenya Gazette published a bill proposing, among other things, the introduction of a digital asset tax at 3% on the sale of digital assets by Kenyan residents. The proposal would require platforms such as cryptocurrency exchanges to withhold 3% from sale proceeds and account to the Kenyan Revenue Authority within 24 hours.
US: President Biden’s proposed digital asset mining tax dropped in debt ceiling agreement
On May 29, 2023, the Fiscal Responsibility Act of 2023 was introduced to Congress as a bipartisan agreement on the US debt ceiling. The bill, subsequently signed into law by President Biden, omitted several proposed tax increases, including the Digital Asset Mining Energy (DAME) excise tax, which would have levied a 30% tax on electricity costs for cryptocurrency miners.
DAME was proposed as part of a package of new taxes announced by the White House Council of Economic Advisers (CEA) on May 2. The CEA highlighted the energy consumption of cryptocurrency mining, claiming that it was comparable to the total energy use of all home computers or residential lighting in the United States.
US: IRS confirms blockchain protocol upgrades are not taxable events
In an April 21 memo, the US Internal Revenue Service (IRS) Office of the Chief Counsel clarified that protocol upgrades in blockchain networks underlying cryptocurrencies do not result in tax consequences under the US Tax Code, provided the upgrade doesn’t create additional wealth and existing cryptocurrency units remain unaltered.
The memo established that, during protocol upgrades, taxpayers do not realize gain or loss under IRC section 1001, which is related to computing and recognizing gain or loss from property sales or dispositions. Additionally, taxpayers do not have an item included in gross income under IRC section 61(a), which encompasses all income from any source, including property dealings.
The IRS noted that protocol upgrades, such as a change in consensus mechanism, do not affect earlier transactions or previously validated and added blocks. Also, cryptocurrency units remain unaltered post-upgrade, with no exchange of units under Tax Code section 1001.
The position of the IRS is that taxpayers retain the same cryptocurrency units before and after the upgrade, and the protocol update does not result in a realization event leading to gains or losses on holdings. Consequently, the protocol upgrade does not trigger income inclusion as provided for in section 61(a).
US: Arizona Governor vetoes crypto tax exemption bill
On April 12, 2023, Arizona Governor Katie Hobbs vetoed Senate Bill 1236, which aimed to prevent most local taxes from being imposed on taxpayers operating computers validating transactions in “blockchain technology,” including cryptocurrency mining.
The bill, which was intended to foster growth in the blockchain industry and attract businesses to Arizona, defined "blockchain technology" as "a type of distributed ledger technology that uses a distributed, decentralized, shared and replicated ledger, which may be public or private, permissioned or permissionless, or driven by tokenized crypto economics or tokenless."
In her veto letter, Governor Hobbs argued that the bill's broad definition of "blockchain technology" hampered local policymaking for “an emergent and potentially energy-intensive economic activity.”
The bill’s sponsor, Senator Wendy Rogers, said it would make Arizona “a crypto-friendly state,” and the veto goes against the flow of related legislation in the state. Current state law, for example, prohibits local governments from interfering with individuals’ right to operate a blockchain node in their homes, and the state in 2022 enacted legislation explicitly carving out income from virtual currency and NFT airdrops from taxable income.
Overturning the veto would require a two-thirds majority vote in both the Senate and the House of Representatives, an unlikely prospect given the bill's initial voting results.
US: Montana blocks tax on crypto payments
On May 2, 2023, the US state of Montana passed Senate Bill (SB) 178, which prevents local governments from imposing discriminatory utility rates for digital asset mining and prohibits taxation on the use of digital assets as a payment method.
The bill defines digital assets as cryptocurrencies, natively electronic assets (including stablecoins and non-fungible tokens), and other digital-only assets that confer economic, proprietary, or access rights or powers. Discriminatory utility rates are described as electricity rates substantially different from other similar industrial uses of electricity in comparable geographic areas after considering the cost of service.
The legislation further prohibits “any additional tax, withholding, assessment, or charge by the state or a local government that is based solely on the use of the digital asset as the method of payment,” but does not restrict the state’s ability to otherwise tax disposals of crypto assets. By banning the discriminatory taxation of digital assets used for payments, Montana aims to encourage consumers and businesses to use cryptocurrencies for transactions and to make the state attractive for cryptocurrency-related businesses.
In addition to restricting local governments' powers regarding cryptocurrency mining and banning additional taxes on crypto payments, SB 178 prohibits specific zoning ordinances against digital asset mining and recognizes digital assets as personal property, impacting their tax classification.
Global: IMF highlights role of CARF in combating money laundering and tax evasion
On April 21, the International Monetary Fund (IMF) released a paper advocating the use of AML measures to improve tax compliance and tackle tax crimes, subsequently raising domestic revenues.
The IMF has previously pointed out the connection between AML and tax compliance in policy papers from as far back as 2012. These papers suggest that money laundering and tax crimes frequently deploy similar techniques, supported by evidence from numerous data leaks including the so-called Panama Papers.
Efforts to address harmful tax competition and improve transparency are interconnected with combating money laundering. Information collected under the AML framework, such as beneficial ownership information under Financial Action Task Force (FATF) Recommendations, is extensively utilized in automatic exchange of information and information request standards. The Crypto Asset Reporting Framework, an international tax exchange framework, builds on AML measures, which aids tax authorities in improving compliance through improved access to information.
The report highlights the relevance of AML frameworks to tax compliance by examining AML preventive measures such as customer due diligence, transaction monitoring, and the automatic exchange of tax information.
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Further Reading
Binance Tax Watch: Q1 2023 Crypto Tax Developments in Europe and CIS
Binance Tax Watch: Q1 2023 Crypto Tax Developments in APAC and the Americas
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