Tax aftermath of the crypto winter

Session Chairs

Sahel A Assar, Buchanan Ingersoll & Rooney PC, Washington DC and New York

Thomas Linder, MME Legal, Zürich

Panellists

Philip Kerfs, Centre for Tax Policy and Administration of the Organisation for Economic Co-operation and Development (OECD), Paris

Cansu Burkhalter, Bitcoin Suisse AG, Zug

David López Pombo, Uría Menéndez, Madrid

Alexandra Courela, Abreu Advogados, Lisbon

Karin Spindler-Simader, Wolf Theiss, Vienna

Anthony V Sexton, Kirkland & Ellis, Chicago

Reporter

Caroline Partoune, Arendt & Medernach, Luxembourg

Introduction

The panel provided valuable insights into the ever-changing cryptocurrency landscape. A key topic discussed was the development of regulations and transparency rules by the Organisation for Economic Co-operation and Development (OECD), with a focus on the recently published Crypto-Asset Reporting Framework (CARF). Additionally, the panel delved into the evolving tax regulations in Austria, Portugal, Spain, Switzerland and the United States (US). Finally, the panel addressed distressed situations in the realm of cryptocurrencies, specifically discussing the impact in the US of the bankruptcy of FTX and other lending platforms.

Panel discussion

Developments at the OECD

Philip Kerfs provided an update on the progress made by the OECD in addressing tax policy issues related to virtual currencies, highlighting the key milestones achieved. The 12 October 2020 OECD report on taxing virtual currencies, entitled Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues, provides a comprehensive analysis of the different approaches among countries, which could help policymakers clarify the tax treatment of cryptocurrencies in their respective jurisdictions. Recent efforts have been focused on tax transparency rules for the crypto-asset market, requiring a thorough review of the OECD’s Common Reporting Standard (CRS). This has resulted in amendments to the CRS and the development of a standalone framework for the automatic exchange of information on crypto-assets, through the publication of the CARF. When drafting the CARF, emphasis was placed on ensuring synergies with measures from the Financial Action Task Force (FATF), anti-money laundering (AML) regulations, the US Foreign Account Tax Compliance Act (FATCA) and CRS concepts, as well as existing due diligence procedures, with the aim of reducing compliance costs for businesses.

The work on the CARF implementation package is still ongoing, and all participating jurisdictions are expected to effectively implement measures to identify virtual asset service providers (VASPs) and ensure their compliance with the rules, potentially including sanctions. The OECD envisions the CARF becoming a standard similar in nature to the CRS, as the ultimate objective is to achieve transparency, which can only be realised through the active participation of all relevant jurisdictions.

Philip Kerfs highlighted the OECD’s commitment to addressing tax policy issues related to crypto-assets and promoting transparency in the rapidly evolving landscape.

Switzerland

Cansu Burkhalter provided an overview of the taxation rules and implementation of the CARF in Switzerland for cryptocurrencies. Cansu explained that the Swiss Federal Tax Administration issued a working paper in August 2019 that clarifies the taxation of cryptocurrencies in Switzerland, establishing a reliable and clear rule-based framework. Generally, cryptocurrencies are considered and taxed as wealth. Capital gains tax applies to the commercial trading of cryptocurrencies under specific circumstances. Income tax is applicable to staking, mining and airdrops, and employees who receive crypto-assets as part of their compensation are required to reflect the value of those assets in their tax statement and pay income tax accordingly.

Switzerland currently applies the existing regulatory tax reporting regimes, such as FATCA and the CRS. However, these regimes do not capture crypto-assets yet and many VASPs fall outside the scope of these rules. Switzerland is closely monitoring developments related to the amendments to the CRS, the implementation of the CARF and the US Green Book tax, among others.

The treatment of cryptocurrencies in Switzerland is quite straightforward, which has contributed to Switzerland’s emergence as a global cryptocurrency hub. The domestic roll-out of upcoming regulatory regimes is pending, and Switzerland is committed to staying up-to-date with global developments in the cryptocurrency taxation domain.

Spain

David López Pombo highlighted that Spain lacks substantive tax rules specifically tailored to crypto-assets and non-fungible tokens (NFTs). Therefore, general tax rules must be applied with appropriate adaptation to digital assets. Interpretative binding rulings from the Spanish tax authorities play a significant role in providing guidance on the matter.

David further discussed the somewhat contradictory nature of crypto-assets in regard to taxation, as well as the tax treatment of transactions involving cryptocurrencies in Spain. For income tax purposes, crypto-assets are generally treated as property, while they are considered as currencies for net wealth taxes of individuals. Transactions such as the transfer, exchange and holding of cryptocurrencies generally result in capital gains for income tax purposes. The value added tax (VAT) treatment of crypto-assets requires case-by-case analysis.

Turning to distressed situations, David discussed Spain’s experience with phishing and exchange bankruptcies, specifically in relation to the treatment of capital losses and indemnity payments, taking into account the different tax rules applicable for Spanish resident individuals compared to corporations. Capital losses related to bankruptcy situations may be more easily deductible for corporate taxpayers, as specific additional conditions must be met for these losses to be allowed as a deduction for individuals. Additionally, Spanish reporting obligations for crypto transactions apply to both individual and corporate taxpayers, and will be entering into force in 2024.

David also pointed out that the Spanish tax authorities have a strict position on requiring evidence on the origin of crypto-assets and, in some cases, they can actively pursue tax and money laundering offences. To mitigate tax and AML risks, evidencing the origin of crypto-assets and funds used for acquisitions is critical, and forensic reports by computer experts may be considered.

Portugal

Alexandra Courela explained that, until the end of 2022, there was a lack of clear regulations on cryptocurrency taxation in Portugal. However, in response to public pressure, the government has introduced a new tax framework for individuals.

Under the new tax regime, a definition of crypto-assets is provided, with NFTs being excluded. Individuals who trade in cryptocurrencies are subject to capital gains taxation at a rate of 28 per cent, with an exemption if the crypto-asset is held for more than one year and the beneficial owner is located in a jurisdiction with a double tax treaty or tax information exchange agreement. Gains from the sale of crypto-assets are only taxable upon conversion into fiat currency, and crypto-to-crypto exchanges are not subject to tax, as the acquisition value of the crypto-asset delivered is attributed to the crypto received. The taxation of other types of transactions remains unclear. Portugal is awaiting the implementation of the European Commission’s amendment to the Directive 2011/16/EU on Administrative Cooperation in the field of taxation otherwise known as DAC8, which introduced annual reporting requirements for crypto and digital asset service providers, and the CARF, but reporting requirements already apply to entities that provide crypto custody or administration services for exchanges with Portuguese tax resident customers. It is uncertain whether these obligations apply to non-resident entities or only to VASPs registered in Portugal. Distressed cryptocurrency situations have limited dedicated rules relevant for individuals.

From a tax and regulatory perspective, challenges include the requirement for entities providing services involving crypto-assets to register with the Bank of Portugal for AML purposes and the requirement for  individuals and companies to file a declaration of commencement of activity with the Portuguese tax authorities when they engage in activities involving virtual assets.

Austria

Karin Spindler-Simader shed light on the recent updates to the tax regime for crypto-assets in the Austrian Income Tax Act. Under the new rules, income from crypto-assets that serve as a medium of exchange (excluding NFTs) is now considered as capital income and subject to a flat income tax rate of 27.5 per cent. This is, in most cases, a more favourable tax rate than the generally applicable progressive tax rate.

There are two distinct categories of income from crypto-assets: current income and capital gains. Current income includes income from lending and mining crypto-assets, while crypto-assets received from staking, airdrops, bounties and hard forks are not taxed at the time of receipt, but rather at the time of subsequent realisation of the full sales price. Capital gains on crypto-assets include income from the sale or exchange of crypto-assets for another asset or service, with a rollover regime applicable for the exchange of one crypto-asset for another.

General tax rules still apply to assets that do not qualify as crypto-assets under the new regime, such as NFTs. Capital gains on NFTs that are not held in the context of a business are only taxable during a one-year speculation period. In a business context, any sale of NFTs is taxable at the progressive rate, regardless of the holding period.

Finally, distressed situations, such as coins becoming worthless, theft, or bankruptcy of an exchange like FTX, do not generally constitute realisation events for tax purposes, according to the Austrian Ministry of Finance. Accordingly, capital losses incurred in such distressed situations are not tax deductible.

It is crucial for taxpayers to be aware of these updated regulations to ensure compliance with the Austrian Income Tax Act regarding crypto-asset taxation.

US

In the US, cryptocurrencies are considered property, not currency, and their sale results in a gain or loss (typically capital, with some exceptions for persons or companies in the business of trading). Anthony V Sexton discussed the issues and challenges arising from distressed cryptocurrency platforms.

With numerous cryptocurrency platforms filing for bankruptcy, Anthony pointed out that many customers who made deposits in cryptocurrency face uncertainties regarding potential unfavourable outcomes for recoveries. There may be ways to construct recoveries to be tax deferred for individuals, depending on whether the deposit is considered a taxable event in the first place. The question of whether tax ownership is transferred upon deposit of cryptocurrency is crucial in determining the tax implications, but currently lacks clear guidance, though some resolutions can arguably by found through analogy to the tax rules that apply to securities lending transactions.

If the customer recovers the same type of cryptocurrency underlying the claim, it may be considered a non-taxable event. Similarly, transferring cryptocurrency between platforms may be treated as a tax-free deemed withdrawal and redeposit. This non-taxable treatment may not be favourable, as it prohibits the recognition of losses as well as gains. However, if the recovery is made in a form other than cryptocurrency, such as cash, it will trigger a taxable event. Finally, while capital losses may be claimed for US tax purposes, Anthony emphasised that other losses may be disallowed under the rules currently applicable to miscellaneous itemised deductions.

Given numerous cryptocurrency exchange bankruptcies over the past year, affecting millions of customers, Anthony expressed deep concern about the lack of clear tax guidance in the US.

Conclusion and final remarks

Throughout the discussion, the importance of clear rules on cryptocurrency taxation was highlighted to ensure a healthy and sustainable crypto ecosystem. The diverse perspectives and insights from the panellists provided a well-rounded understanding on the complexities of crypto-asset regulations and fostered discussions on responsible and effective regulatory approaches in the dynamic environment of cryptocurrencies. It is crucial for individuals and businesses involved in cryptocurrency transactions to stay up to date with the evolving tax and regulatory landscape to ensure compliance with the laws. Seeking professional tax and legal advice is recommended to navigate the complexity of cryptocurrency taxation.

Disclaimer

The information contained in this report is of a general nature and intended to be educational. Any applicability of the rules should be reviewed with tax counsel. Nothing in this report should be construed to constitute investment advice, tax advice, or securities advice in any manner, shape, or form.