Key takeaways
Innovative sectors like crypto bring new challenges for policymakers and tax administrators, who must adapt old frameworks to new assets, or create new ones from scratch.
Adequate, fair and proportionate tax policies, accompanied by technical and precise guidelines, benefit both the crypto sector and national economies.
Levying taxes on raw crypto trades, imposing withholding requirements on intermediaries, and neglecting best practices tested around the world are not optimal approaches to taxing digital asset activities.
Strong tax policies are essential to any economy. The history of tax systems around the world suggests that successful tax policies have managed to strike the right balance between efficiency and fairness, a complex formula that depends on the economic and social context of each country.
Innovative business models and sectors often present new challenges for policymakers and tax administrators, encouraging them to design and apply adequate rules and guidelines. These new frameworks must be clear enough to allow users and service providers to remain compliant in their operations while stimulating the economy through innovation. Digital assets, for example, offer a multitude of innovative use cases thanks to their unique ability to hold and transfer value without interacting with traditional financial intermediaries. This of course involves new approaches to taxation.
This blog post outlines some general principles that constitute optimal tax policies for the crypto-asset sector and highlights several best practices around the world as well as pitfalls to avoid when it comes to establishing tax regulations for cryptos.
Action Items: Ideas for Effective Tax Policies and Administration
Establish tailor-made frameworks
Recommended action: Add crypto-specific provisions that take into account all new types of activities and transactions that may take place in the sector.
Rationale: Existing tax laws are often decades old and are generally difficult to apply effectively to digital assets.
Focus on clarity
Recommended action: Provide detailed, technical and precise rules and guidance. If no crypto-specific legislation is yet available, provide FAQs or official guidelines.
Rationale: Many people are intimidated by their tax return; adding crypto transactions to it only complicates the task. Detailed rules and guidelines would be welcome in this situation.
Ensure its proportional nature
Recommended action: levy taxes and establish reporting requirements for cryptos that match requirements for similar industries (e.g. finance and technology), or at least not more onerous.
Rationale: Avoid inhibiting innovation in digital assets by making tax compliance for crypto more costly and burdensome than for other similar types of activities.
Tax fairness and efficiency
Recommended measure: favor taxes on capital gains made instead of taxes on transactions, which are often uneconomical in the digital finance sector.
Rationale: Services related to digital assets and cryptos often operate in a similar way to those in the financial sector, where investments and easily tradable (negotiable) assets are mostly exempt from VAT (value added tax) or GST (goods and services taxes). Otherwise, the tax cost would make them practically unfeasible.
Encourage the creation of attractive policies
Recommended measure: propose more advantageous tax treatment for crypto-related activities, for example by reducing tax rates or implementing exemptions on capital gains from sales of digital assets.
Rationale: foster innovation and economic growth, and attract talent and high value-added taxpayers. Recent decades have seen tax supports for investments and tech professionals: similar policies are expected for crypto, which will be the source of the next big technological disruption.
How: Various relevant policy measures have already been taken in several regions of the world, for example:
i) No tax on capital gains from the sale of crypto-assets for investors or one-off traders (i.e. non-professional traders). This general policy is notably in force in Singapore, Belgium, Malaysia, Hong Kong and Switzerland.
ii) Exemption from capital gains on long-term holdings. Germany and Portugal are among the countries where this preferential treatment was recently introduced for crypto-assets held for more than 12 months.
iii) Exemption from capital gains if they are below a de minimis threshold. This policy is, for example, applied in the United Kingdom and Brazil.
iv) Taxation of capital gains only in the event of conversion (direct or indirect) into fiat currency, or non-taxation of transactions carried out only in cryptos. France, Portugal and Austria are among the countries that have implemented this approach.
Things to Avoid: Tax Policies That Hold Back Crypto Innovation
Taxation of gross transactions
Do not collect taxes on raw crypto trades: this particularly concerns the various fees associated with these transactions. Instead, the capital gains made should be taxed.
Rationale: Such an approach imposes significant (sometimes even unbearable) tax costs on trading activities. First, it punishes even one-off investors, who may see their unprofitable trades taxed, even if tax refunds are paid later. Second, such taxes would place an almost impossible burden on the shoulders of market makers, who typically execute hundreds or thousands of automated trades per day in order to make small gains on many trades. At the end of each period, a market maker would likely have a much higher tax liability than the gains he or she reaped. In the meantime, it is the market makers who provide the essential liquidity to the cryptoeconomy. If they leave the market, it will take a hit. The main impacts are the disappearance of local liquidity and volumes as well as increased volatility, which actually stifles local crypto markets. A smaller crypto economy would drive away market participants, which in turn would cause a decline in total tax revenue.
These cascading negative consequences have already been seen in jurisdictions where transactional taxes of this type have been established. Here are the two most convincing cases:
Indonesia: After gross transaction taxes (0.11% VAT and 0.1% income tax withheld by local exchanges) came into effect in May 2022, the trading volume of local crypto exchanges has increased down about 60% according to Coinmarketcap data.
India: Weekly trading volume of local crypto exchanges decreased from around $800 million to $2 million following the implementation of a gross transaction tax (1% withholding tax) in July 2022 ( always according to Coinmarketcap).
We should instead consider the creation of taxes levied only on the capital gains made.
Use tax withholding obligations to ensure compliance with legislation
Do not put in place tax withholding obligations for intermediaries such as exchange platforms. While at first glance this may seem like a good way to enforce tax compliance in the crypto space, such a move could easily harm the industry.
Rationale: Several unfavorable situations could result.
If a withholding tax obligation is imposed on trades, it would essentially become a transactional tax which would have the effects described above.
If a withholding tax obligation is imposed on other sources of income, for example mining or staking profits, it may be unfair or impractical. Unfair, because it could inaccurately presuppose the legal nature of these events (for example by treating as an interest something which is not); unfeasible, as there is often no easily identifiable intermediary, as in the case of DeFi products and services.
Withholding tax requirements will likely be much more difficult to enforce in crypto than in other sectors. One of the reasons for this difficulty lies in the fact that the actual deductions would mainly be made in cryptos, while with a few exceptions, their subsequent collection in public revenues would have to be done in fiat currency. This creates an additional step of conversion, which not only adds significant complexity but also a potential obstacle, as fiat output channels are not always available.
Instead, consideration should be given to using crypto reporting frameworks currently being adopted, for example the OECD CARF.
Poor alignment of national tax policy with (good) international standards
Do not ignore international best practices. Tax policy development regarding cryptos is in its early stages and is expected to expand significantly in the coming years. That said, some standards have already started to be set around the world, and these efforts should not be ignored. The widespread exemption of cryptocurrency transactions from VAT/GST is a crucial example.
Rationale: By rejecting policies as important as this, a nation would likely place itself in an extremely unfavorable industrial development situation.
Instead, consideration should be given to integrating international bodies where technical discussions take place, to more easily leverage best practices and rules that are developed and used around the world.
Would you like to know more about the taxation of cryptocurrencies and the measures taken by Binance to make it easier for users to complete their tax return? Check out the following resources:
How are cryptocurrencies taxed?
Paying your taxes on cryptocurrencies helps you and the entire Web3 industry: Here's how
Introducing Binance Tax: Simplify your tax return
How to generate reports from Binance Tax?
Trade anywhere with the Binance mobile crypto trading app (iOS/Android)
Find us on :
Instagram : https://www.instagram.com/binancefrench
Twitter : https://twitter.com/LeBinanceFR
Facebook : https://www.facebook.com/BinanceFrance
Telegram : https://t.me/BinanceFrench
Risk Warning: Digital asset prices are subject to high market risk and price volatility. The value of your investment may fall as well as rise, and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance is not responsible for any losses you may incur. Past performance is not a reliable indicator of future performance. You should only invest in products that you are familiar with and whose risks you understand. You should carefully consider your investment experience, financial situation, investment objectives and risk tolerance and consult an independent financial advisor before making any investment. This does not constitute investment advice, nor an inducement or recommendation to trade in any digital asset. For more information, see our Terms of Use and Risk Warning.
