Research: Suggestions for Taxing Bitcoin Miners and Cryptocurrencies
The author is from Xiamen National Accounting Institute (a research institute under the Chinese Ministry of Finance)
Original link: https://mp.weixin.qq.com/s/y7agoPj-57Av9g1gh-9fSQ
On January 3, 2009, the first Bitcoin was born, which was also the creation of the currency from the era of credit currency to the era of decentralized currency. The taxation of Bitcoin in various countries is compared, in order to learn from China’s taxation method on cryptocurrencies such as Bitcoin.
Taxation practices of various countries for Bitcoin
In 2014, the US Internal Revenue Service officially launched the taxation of Bitcoin. The U.S. Digital Cryptocurrency Tax Announcement (IRS Notice 2014–21) first stipulates that the tax link includes the sale of cryptocurrencies, the purchase of goods, services and holding, and then specifies the corresponding specific tax obligations according to the tax link.
In the bitcoin issuance process, that is, “mining” to obtain income, the fair value on the date of acquisition is used as the basis for tax calculation. If the act of mining forms a business, individuals have to pay individual business tax. In the bitcoin transaction link, when bitcoin is used as a means of payment to purchase goods or services, the party accepting bitcoin calculates the payable income tax and consumption tax based on the fair value on the date of acceptance. The payer calculates the tax based on the difference between the market price of Bitcoin and the goods and services. In the Bitcoin holding link, the tax category is determined according to the length of holding time. Capital gains tax is paid if the holding is more than one year, and the tax rate is between 0% and 20%. If the holding is less than one year, income tax is paid, which is the same as the ordinary income tax rate, which may be as high as 39%. Capital gains taxes in the U.S. are lower than income tax rates. This provision shows that the U.S. government encourages long-term holdings of cryptocurrencies such as Bitcoin.
Although the United States has formal regulations for taxing Bitcoin, due to the anonymity of Bitcoin, the government has no way of knowing the transaction records and taxpayer information, and there are many people who do not report Bitcoin-related income, and there are great difficulties in taxation. In 2016, the IRS required the US exchange Coinbase to provide it with some personal information of Coinbase users. In 2019, the Internal Revenue Service began to send warning letters to cryptocurrency investors who did not correctly declare their income and pay taxes, urging them to bear the tax obligations related to cryptocurrency in accordance with regulations.
In the early days of cryptocurrency development, the United Kingdom imposed a 20% value-added tax on it. This is not conducive to its development in the United Kingdom, which subsequently issued taxation rules for cryptocurrencies in 2014. The British Tax and Customs Administration defines Bitcoin as personal property, and its related tax obligations are relatively small. It believes that mining is not closely related to income, so this link is exempt from VAT. There is also no value-added tax on the exchange of Bitcoins for other fiat currencies. Individuals need to pay capital gains tax and companies pay corporate income tax on the income from transactions using Bitcoin. In 2019, the UK’s rules on taxation of encrypted assets were updated, and the tax office listed the behaviors related to cryptocurrencies that would generate tax liabilities. Mining activities are considered taxable, as are businesses that provide goods or services to obtain bitcoins.
Japan has the highest acceptance of cryptocurrencies such as Bitcoin, which is a legally regulated payment method. Initially, Japan imposed an 8% consumption tax on taxpayers purchasing such currencies. In September 2017, Japan abolished the consumption tax of bitcoin, and included the income obtained in bitcoin transactions into other income, and added it with salary income, dividend income and other income for comprehensive collection. When personal other income exceeds 200,000 yen, a confirmation declaration is required. Income tax should be calculated on the basis of the difference between the selling price and the buying price. Since the price of Bitcoin changes frequently, the buying price can be calculated by the moving weighted average method or the total average. In Japan, Bitcoin exists as an asset similar to stocks. However, the tax rate applicable to profits from Bitcoin exchanges is higher than that of stocks. The tax rate is determined according to the size of the total income, ranging from 5% to 45% (excluding 10% resident tax). No tax is paid during the holding period of Bitcoin.
The Australian Taxation Office’s point of view is that transactions in Bitcoin are equivalent to barter, and the tax rules should be similar. Bitcoin is not a legal tender, but an asset for capital gains tax purposes. In the “Notice on Tax Collection of Cryptocurrency”, it is stipulated that the collection of income tax on such assets should be determined according to the purpose of holding. Taxpayers are required to pay consumption tax and income tax when purchasing goods and services with Bitcoin, and the consumption tax on cryptocurrencies was abolished in 2017. Taxpayers are exempt from tax when they purchase goods or services in cryptocurrency that cost less than $10,000 and use them themselves. Cryptocurrencies held for investment purposes are not tax-exempt. Mining income is subject to income tax. Beginning July 1, 2018, foreign currency taxation rules apply to Bitcoin.
Countries have not reached a consensus on the attributes of Bitcoin, and even different groups in a country have very different definitions of Bitcoin. The taxation of Bitcoin is still in its infancy in various countries, and tax policies are not yet standardized and mature. The changes are so large and frequent that many taxpayers are not aware of their tax obligations related to Bitcoin, which brings great difficulties to tax collection and management. Judging from the results of the implementation of relevant tax policies, it is not ideal. However, if cryptocurrencies are to be legalized in the future, it is essential to formulate a matching tax system.
Suggestions for taxing cryptocurrencies in China
After the release of the “Announcement on Preventing Financing Risks of Token Issuance” in 2017, the exchange of domestic digital currency and legal tender was completely suspended, and its circulation and sale in China were prohibited. However, the state supports the blockchain technology used in digital currencies.
At present, China can only restrict the circulation and sale of Bitcoin, but cannot prohibit the production or “mining” link. Moreover, Bitcoin has an anonymous nature, and users can conduct transactions abroad. Therefore, the circulation of Bitcoin is very active, and failure to tax it will result in the loss of tax sources. Although the country prohibits the circulation of Bitcoin due to the consideration of Bitcoin hype, it is feasible to tax the “mining” link. Moreover, many countries in the world have gradually relaxed the supervision of Bitcoin. China should adopt a cautious and inclusive attitude to allow Bitcoin to develop in a standardized manner under supervision. Therefore, it is necessary to consider taxing the transaction and payment links of Bitcoin.
From production to circulation, Bitcoin involves multiple tax links, and the transaction activities are more complicated, involving many subjects. Based on the existing tax framework, this paper proposes from three aspects: “mining”, circulation, and sales of Bitcoin to give suggestions for taxing cryptocurrencies.
“Mining” means that each user uses a computer to guess the hash value of the previous block in order to obtain the right to write the next block. The income obtained from the “mining” can be regarded as two parts, one is the Bitcoin income that is pre-set by the system and rewarded to users who have the right to write; the other is the fee income. The “mining” behavior itself is to use computers to solve mathematical problems, so the “mining” behavior of taxpayers can essentially be regarded as a guarantee for the information on the entire blockchain. Therefore, the reward income obtained by taxpayers can be regarded as service income; the service fee income can be regarded as the income collected by users who have not obtained the writing right from users who have obtained the writing right.
According to the essence of the business, the “mining” link needs to collect value-added tax and income tax. First of all, the collection of value-added tax can be discussed from two aspects: input tax and output tax. The expenses that constitute the input tax amount for “mining” activities are the expenses for purchasing special-purpose computers, electricity fees, site fees, etc., which can be handled with reference to current value-added tax regulations in China. However, the acquisition mechanism of Bitcoin makes it uncertain for the “mining” behavior to obtain the right to write blocks and obtain rewards. In this case, it can be judged based on the taxpayer’s subsequent processing. If the taxpayer continues to engage in “mining” activities in the future, the input tax that has not been deducted before can be accumulated and allowed to be deducted within a limited period; If the taxpayer no longer engages in “mining” activities, the accumulated input tax credits should be transferred out. The basis for calculating the VAT output tax in the “mining” link should be divided into reward income and service fee income. For reward income, the fair value of the bitcoin on the day when the reward is obtained is the tax basis for the output tax; for service fee income, the full amount of the service fee income can be used as the tax basis.
Secondly, the collection of income tax in the “mining” link can be discussed from two perspectives: individuals and enterprises. As mentioned above, the “mining” behavior can be regarded as a credit guarantee. According to the State Administration of Taxation Announcement №74 of 2019, individuals who obtain guarantee fee income need to pay personal income tax according to the “occasional income” item. Therefore, the income obtained from “mining” activities can refer to the above regulations and pay personal income tax. If the enterprise “mining” initially obtains bitcoins, the fair value of its rewards and handling fees will be used as the tax basis, and the enterprise’s mining costs will be confirmed at the same time to calculate the taxable income.
The circulation link refers to the behavior of companies or individuals using Bitcoin to buy and sell goods or services. Value-added tax and income tax can be levied at this stage. At present, for the value-added tax in the circulation link, it is generally regarded as the collection of “barter” behavior, that is, the buyer and the seller interact with each other. However, due to the anonymity of Bitcoin, the basis for tax calculation cannot be reliably measured, tax authorities can use the method of ratified collection to collect taxes. And the government can supervise the circulation of Bitcoin by setting up a unified exchange, which is also conducive to the acquisition of tax information.
For the collection of income tax, the corporate income tax law regards the exchange of non-monetary assets as sales, so the gains obtained from the purchase and sale of bitcoins are taxable income. Personal “barter” can be regarded as property transfer and pay personal income tax.
The sale link refers to the behavior of units or individuals selling bitcoins obtained from “mining”. In this link, value-added tax and income tax need to be levied. For value-added tax, the output tax should be confirmed based on the fair value of the bitcoin market on the date of sale. At the same time, the seller should establish a detailed flow record of bitcoin, adopt the first-in first-out method, and use different tax bases for different channels to obtain bitcoin. Tax deduction, pay attention to avoid double taxation.
For income tax, the income should be recognized on the day when bitcoins are sold, and the income should be recognized as property transfer income after deducting costs and expenses to calculate corporate income tax and personal income tax. And when calculating and levying corporate income tax, we should pay attention to the problem of making up for losses.
Thoughts on tax collection and management
The cryptocurrencies represented by Bitcoin are developing rapidly while the blockchain technology is also highly professional. At present, the tax authorities have not formed a clear understanding of cryptocurrencies, so there may be difficulties in collection and management. The biggest problem in taxing cryptocurrencies is the acquisition of tax information. In this regard, this paper proposes the following ideas:
1. The government uniformly establishes a standardized digital cryptocurrency trading platform. Due to the anonymity of cryptocurrencies, it is difficult to obtain tax information. The unified trading platform set up by the government can solve the tax collection problems caused by anonymity. But at the same time, the digital cryptocurrency has lost its characteristics of decentralization and anonymity, and the privacy protection of taxpayers is also a noteworthy issue.
2. The tax authorities should improve the monitoring system, conduct real-time monitoring of all links, evaluate the value of digital cryptocurrency held by taxpayers, require mine owners to declare tax information, implement withholding prepayment, and year-end settlement.
3. Since the international circulation of cryptocurrencies is very convenient, tax authorities should pay attention to international cooperation and sharing of tax-related information when collecting and managing, so as to prevent international double non-taxation, avoid international double taxation and better promote the development of the digital economy.
With the continuous development of technology and economy, cryptocurrencies have become more mature. It is very necessary to tax cryptocurrencies . At present, countries have different tax collection and management of cryptocurrencies. It needs to combine the current national conditions, learn from the practices of other countries in the world, and establish a taxation mechanism for cryptocurrencies in China as soon as possible to better serve the digital economy from the two aspects of tax law and tax collection.