Bitcoin, Cryptocurrency and Taxes: A Crypto tax guide with examples

I work spil the Business Operations Manager at Neufund, a blockchain-based startup building a community-owned investment ecosystem on the Ethereum Blockchain.

I take care of various things, one of which is the company’s budget. When wij commenced te September 2016 this wasgoed effortless. Classical budget for a “classical” startup: Managing monthly expenses being the main task. Sometimes (hopefully) some investment activities vereiste be tracked. Revenue? No.

At that time, this felt like an effortless job to do, especially for someone who likes spreadsheets and money. At the time I had no f*cking clue…

Very shortly after, I somehow found myself te the position where I wasgoed supposed to manage normal money (fiat currencies) on a handelsbank account at a well-known Berlin-based handelsbank and “alien” money (cryptocurrencies) on a corporate account at Losbreken, one of the fattest crypto-exchanges.

There is no budget template for that. I can assure you. I wasgoed already talking about the challenges of managing a blockchain-startup ter my previous postbode the food chain of Blockchain. So I won’t commence again on how hard my life is,) This is the follow-up on the part where I talk about bookkeeping challenges.

After the bookkeeper somehow understood the vague concept of cryptocurrencies, he asked mij at that time not that of an visible question: Can you please send mij the account statement from Losbreken? So I can go after the transactions and calculate taxes?

This wasgoed a turning point. I commenced researching, talking to experts and applying my findings to Neufund’s operations. Now I want to share with you. Hopefully it will shed some light on the darkness of cryptotaxes.

But before I start: This is just a general guide and not a legal or tax advice! See also more information at the bottom.

VAT regulations

This is how the Blockchain Policy Initiative Report’s chapter on cryptotaxes starts. Not so inviting for people like mij. It means trouble. Since the report concentrates on VAT regulation regarding cryptocurrencies and cryptotokens, I will discuss the results of its analysis. Straks I will also on focusing on operational implications of trading cryptocurrencies and -tokens.

Based on the ruling of the European Court of Justice (ECJ) ter 2015 trading Bitcoin is exempted from VAT. Hence the Blockchain Policy Initiative Report argues that this should be applicable for all cryptocurrencies and -tokens spil long spil they serve spil means of payment. Which would be good news since paying VAT every time you buy or sell a cryptotoken would kill the market…and bookkeepers. However straks on ter the report the distinction inbetween cryptocurrencies and cryptotokens is made more clear and so are the interpretations of the ruling ter various jurisdictions:

With regards to taxation, it became clear, following the 2015 ruling of the Court of Justice, that the exchange of traditional currency for Cryptocurrency is exempt from VAT. Albeit the policy before the judgment varied te at least one jurisdiction (Poland), it seems that the ruling has unified the treatment across the EU’s Member States. The situation is much less clear with regard to the application of VAT to Tokens. At least ter two jurisdictions (Poland, the UK) there some doubts spil to whether the VAT exemption should apply. Other jurisdictions have no guidance available from the authorities on that punt (Malta). Whereas ter Switzerland, VAT may apply. The reason is the various characteristics of a given Token, which might trigger different tax treatments. On the other forearm, similar treatment is expected ter certain jurisdictions (Germany, Estonia).

This analysis wasgoed based on a legal questionnaire directed to law firms from all overheen the world that wasgoed sent out to collect information on legal frameworks regarding Blockchain. One of the questions there wasgoed about the VAT Directive and the distinction ter treatment inbetween cryptocurrencies and cryptotokens. Poland, Germany, Estonia, UK, Malta, China, France and Switzerland answered. I compiled a summary for you:

Cryptoaccounting cryptotaxes te the not-so-crypto-world

Now that I have introduced you to the effortless part, being VAT regulations, I want to discuss a few cases where the income tax place the key role. This is the most confusing part of cryptotaxes…

Very first Case: Exchanging fiat currencies for cryptocurrencies

Let’s say you spil a private person OR you spil a company have 10000 EUR and exchange it for ETH. Basic case.

According to the research, ter most jurisdictions you are obliged to report any gains or losses on the exchanged money. But let mij concentrate on the joy part — gains (demonstrating you examples on losses could be to depressing ,P) and only German regulations. So if your 10000 EUR worth of ETH at the point of exchange is now worth 30000 EUR and you project to sell it for EUR again, you have to report 20000EUR of gains and this will be taxed.

At this point there is one distinction, at least according to German law: If you are a private entity and you kept your ETH un-exchanged for more than one year, you do not have to pay income taxes on the gains. This is tremendous news for private crypto-speculators and -traders. If your “token is capable of being an ongoing source of income” (SMP — Tax treatment of crypto tokens ter Germany, pagina 1), you have to wait ten years ter order it be tax-free. Minor set-back.

However, if you dispose of your cryptocurrencies before the given period by selling it for EUR or buying e.g. coffee or a flight toegangsbewijs with it, the utter gains are taxable. The exchange for other economic asset is key here. But no worries, evidently if your gains are up to 600 EUR vanaf year you do not have to report your gains at all. You can still buy your coffee with ETH and you won’t be cuffed for it at the end of the year. Just don’t drink too much coffee ,)

Te the case of a legal entity thesis rules sadly do not apply. A company needs to report the gains and pay taxes on it. Every. Single. Time.

2nd Case: Exchanging fiat currencies for cryptocurrencies and then trading cryptocurrencies for other cryptocurrencies

Let’s say you have exchanged 10000 EUR for ETH and then used your ETH to buy altcoins. Another basic case.

Again you are obliged to report gains and losses. But it this case twice. Very first of all you need to report the gains or losses on ETH (your 10000EUR worth of ETH became worth 15000EUR during the week until you determined trading) and then you are also strapped to report the gains or losses on the altcoin-trade (your 15000EUR worth of ETH became 25000EUR worth of an altcoin).

The distinction ter German law stays the same: Private entities do not have to pay taxes on the gains if they hold their cryptocurrencies (kicking off from the very first conversion of fiat currency into cryptocurrency) for more than a year. Legal entities are obliged to pay taxes on proceeds the uur it is cashed out to fiat currencies again or exchanged for other economic assets.

Ter both cases there is one rule to be followed:

THE RULE OF REFERENCE PRICE

Bookkeeping can get very complicated already at this point. I will talk more about it zometeen on. But to make your life and the lives of tax authorities lighter and the bookkeeping cleaner: YOU SHOULD ALWAYS REFER TO THE SAME EXCHANGE WHEN IT COMES TO THE PRICE/EXCHANGE RATE OF THE COIN. This simply means that during the entire year, if you do transactions similar to Case 1 and Case Two, you should always calculate with the price from the same source. If you bought your very first ETH e.g. on Losbreken and then traded it on Bittrex, to calculate all your losses and gains on ETH you should use the corresponding price of it ter EURs on Openbreken. This is very significant to recall when you prepare your accounting statements.

Third Case: You want to pay your employees ter cryptocurrencies

This proves to be a entire different story. Te this case the company very first needs to obtain cryptocurrencies (here: ETH). Then transfer it to the employee. Then the employee can exchange it into fiat currencies (or not).

For the company there are two reference prices: If Ether bought specifically for the salary payment has a higher valuation, you of course need to report the gains. Then the employer pays income taxes (ter EUR) on the EUR worth of the ETH transferred to the employee at the time of the transfer. The employee again, spil a private entity ter Germany, won’t have to pay taxes on gains if he/she holds it for longer than one year.

This is of course the case when the employer transfers a onbelast amount to the employee. If it is a freelance agreement and the freelancer receives a brutto amount, he or she is obliged to pay his/hier income taxes on it te EUR anyways. The reference price of ETH is from the day of the transfer. Not confusing at all ,)

Bookkeeping: How do I archive all those transactions?

For all those of you who somehow take care of finances and accounting at your companies it is nothing fresh when I say that every month the company is obliged to submit monthly handelsbank account statements, credit card statements and e.g. Paypal account statements along with all receipts and invoices to the registeraccountant. Well… you need to do the same with all crypto currency transactions. For that the crypto-world, and by that I mean the exchanges, are not ready yet.

What I propose to do is:

  1. Download CSV files with all transactions from Losbreken, Bittrex, Poloniex or where everzwijn you have your crypto-corporate accounts (yes, you need a corporate account spil a company).
  2. Create your own spreadsheet where you go after your every budge and transaction with activity, date, exchange rate, purpose and amount.
  3. Attempt to align all transactions from the CSV to the spreadsheet (this should be your proof of the transactions).

BTW if you know about existence of any helpful implement created exactly for thesis purposes – LET Mij KNOW. Once discovered, it will go big!

Mining — a entire different cryptotax-world

Spil you can see I haven’t lost a single word on taxing mined cryptocurrencies and cryptotokens. This has one reason — neither Neufund strafgevangenis mij privately are mining, so wij are te no position to talk about it. Nevertheless, spil follow-up to this postbode and Blockchain Policy Initiative Report I am programma to embark writing a Global Cryptotax Report. I am ter the process of talking to various tax firms all overheen the world right now. If you are interested te joining or know an experienced ter this field feel free to voeling mij at [email protected]

Conclusion

Spil you can see it is a mess. But on the bright side, spil wij like to say at Neufund: Unknown unknowns became known unknowns. This is the very first step towards defining the ecostystem of cryptotaxes. It is rather difficult to apply existing (read: old and conservative) regulations on such an innovative concept spil cryptocurrencies and especially -tokens. Te my opinion, once cryptotokens are defined spil a fresh asset class, fresh tax regulations will go after. It all depends on how swift regulators can adapt and learn. Understanding the underlying concept is crucial for unifying the legal perspective on cryptoassets. For now, lets work with what wij have,) Have joy!

Legal disclaimer: You should not rely on this article spil legal or tax advice. It is designed for general informational purposes only and author is not a qualified lawyer. You should seek advice from your own counsel. Author takes no responsibility for using information provided ter this article for any purposes.

Related movie: BITCOIN FOR BEGINNERS �� Observe This BEFORE Investing Te Bitcoin!


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