TaxDAO Hot Questions and Answers: Will mining, trading, and salary payments be taxed?

Self-introduction

I am Liam. I have worked in finance and taxation in various industries. I came into contact with the community in 2017. For several years, I was in charge of taxation at a high-growth blockchain company. Since I started working in the community, I have experienced two bull and bear cycles and witnessed the baptism and transformation of the industry. These drastic changes have greatly affected my own work and life patterns, and also made me look forward to the development of the industry.

Why Tax DAO was established and what it hopes to do

The market value of cryptocurrencies has reached nearly 3 trillion U.S. dollars in the latest bull market. This field is becoming more and more important and cannot be ignored. At the same time, compliance and regulatory systems for cryptocurrencies are gradually emerging in various countries. Of course, the regulatory directions of these compliance policies are different, and tax policies are also of particular concern.

The establishment of TaxDAO was not something that was planned in advance. As a worker in the industry, I pay close attention to the development of the industry and cryptocurrencies. When some cases related to finance and taxation appeared, I became very interested. In the process, I kept communicating with like-minded partners, and the idea of ​​establishing TaxDAO became relatively clear.

We hope to help the community better comply with and face tax compliance and tax issues by establishing TaxDAO. We also hope to use our professional capabilities to help the community find a relatively clear tax compliance path, thereby bridging the gap between tax supervision and the industry. If we can promote the relevant legislative process to a certain extent, collecting information and demands and speaking out may be more meaningful and valuable to the industry.

As for organizational autonomy, we hope to use DAO, an open platform, to gather more professionals and practitioners who are interested in the "cryptocurrency industry and taxation" to jointly help the industry to streamline its compliance path, and conduct some basic research and construction in the relatively early stages of industry tax supervision to help the industry's future compliance development.

What do you think about the field of taxation and cryptocurrency?

1. Challenges and opportunities coexist

The rise and development of cryptocurrency has brought huge challenges to traditional tax collection and management. Not only is there a lack of relevant regulations at the tax law level, but there is also a lack of grip at the tax collection and management level. Tax management in the field of cryptocurrency is a niche and popular topic. Whether it is a taxable object, the determination of tax obligations, the links of tax collection, the acquisition of transaction information, and international tax supervision will become key and difficult issues in the future. Behind the challenges are opportunities. For tax authorities and taxpayers, how to foresee the future development form in advance, make advance preparations, and improve the compliance of tax treatment will benefit the present and the future.

2. Uncertainty and Certainty Coexist

Under the current regulatory situation, there is uncertainty about whether cryptocurrencies can be taxed, how to determine tax obligations in the circulation of cryptocurrencies, and how tax authorities obtain information on cryptocurrency transactions, that is, lack of supervision. This also brings great uncertainty to cryptocurrency owners, traders, and related parties. Many practical issues such as how to levy taxes in the future, whether it will be retroactive, and how to regulate companies and individuals in the industry need to be clarified. Major economies around the world have gradually clarified the taxation of cryptocurrencies. Although my country does not have supporting tax collection and management regulations at this stage, in the context of the gradual strengthening of international tax management and personal anti-tax avoidance, the tax management of cryptocurrencies and trading activities will be gradually improved and optimized, which is also certain in the future.

3. Parallel cognition and action

The field of taxation and cryptocurrency is currently a fertile ground for research. Various academic studies and theoretical discussions are in full swing. Relevant tax policies and tax collection and management regulations are still in a semi-vacuum. Relevant personnel in the industry must have a new understanding and ideological preparation for tax treatment. Before the specific regulatory system is improved and determined, they must promptly optimize their own tax treatment, understand the spirit of relevant documents, and make preparations in advance to protect their own legitimate rights and interests in the context of future tax collection and management in the industry.

Which cryptocurrency tax areas are you most concerned about at the moment?

We have currently observed that several aspects of crypto assets involve tax issues

1. Production or issuance of cryptocurrency

How should the company collect taxes on cryptocurrencies obtained through mining , and can the corresponding input costs be deducted? In some energy-scarce countries or regions in Europe, since the production of cryptocurrencies requires a large amount of energy, the local tax bureau will impose profit tax on the income generated by the company's mining activities according to the profits. For energy-rich countries such as Russia, mining activities are currently only taxed according to ordinary corporate operating income. For the United States, there is no unified taxation regulation at the federal level, and each state shall make regulations based on local conditions. Some states with tight energy will impose corporate taxes and property taxes on corporate entities during the production process. However, in states with energy surpluses, local tax bureaus will issue a series of tax exemption policies to promote industry development.

2. Cryptocurrency trading

In the transaction process, the taxation understanding of each tax jurisdiction is different, but overall, the practice of taxing cryptocurrencies as property is the most common. The United States passed a bill in 2014 that clearly stated that cryptocurrencies should be treated as property, and the corresponding value-added and income should be taxed as property, regardless of its monetary attributes. The income corresponding to cryptocurrencies obtained by legal entities through mining should be levied as income tax, and the corresponding costs, including electricity costs and equipment movable property expenses, should be deducted accordingly. In the cryptocurrency trading process, the corresponding value-added part belongs to capital gains and is taxed according to capital gains. Major European economies such as Germany, the United Kingdom and France basically believe that in the process of cryptocurrency trading, the income should be regarded as property transfer income, and the corresponding income tax or value-added tax should be levied.

3. Payment of Cryptocurrency

The tax treatment of the payment link mainly depends on whether the tax collection behavior has legal support. Taking Russia as an example, some countries or regions believe that cryptocurrencies can be exchanged for local currency or foreign currency and have monetary attributes. Therefore, the payment function is a manifestation of monetary attributes and does not generate tax obligations. Some countries have a vague definition of the monetary attributes of cryptocurrencies. Taking Germany as an example, Germany clearly states that cryptocurrencies are not legal tender, but individuals are allowed to use cryptocurrencies as a means of payment, which is also a manifestation of monetary attributes. Similarly, this link does not need to pay taxes. The US Internal Revenue Service is relatively conservative in its determination of the tax obligations of this link. It regards taxpayers' use of cryptocurrency payments as a two-part transaction consisting of barter, that is, the difference between the cryptocurrency payer and the goods or services obtained is taxed; the cryptocurrency acquirer needs to convert the cryptocurrency obtained into legal tender and pay taxes.

4. Holding of Cryptocurrency

The determination of tax obligations in the cryptocurrency holding stage not only places high demands on the tax law system of the tax jurisdiction, but also poses a great challenge to the tax bureau's collection and management capabilities (the acquisition of holding information). The US Internal Revenue Service should have a strong ability to obtain taxpayer information and be able to carry out corresponding collection and management work to a certain extent during the cryptocurrency holding stage. Generally, the income obtained from a short holding period (such as within 12 months) is regarded as short-term capital gains and is subject to higher income tax; the income from long-term holding investments (holding period of more than 12 months) is regarded as capital gains and is levied according to capital gains tax, and the corresponding tax rate is relatively low.

There are many Chinese entrepreneurs in Hong Kong and Singapore. As institutions, how are they taxed?

Currently, institutional investors conducting cryptocurrency-related businesses in Singapore may need to pay income tax of up to 17% on the profits they make, and goods and services tax on cryptocurrency transactions is temporarily exempted. Those conducting cryptocurrency-related businesses in Hong Kong may need to pay profits tax of up to 16.5% on the profits generated in Hong Kong.

On April 17, 2020, Singapore issued the "Cryptocurrency Income Tax Guidelines", which classified cryptocurrencies into payment tokens, utility tokens and security tokens, and made detailed provisions on whether and how to tax the income generated from the acquisition, holding and disposal of different types of cryptocurrencies in different ways (such as goods trading, purchase, airdrops, mining, etc.).

The Hong Kong Inland Revenue Department issued the "Interpretation and Practice Notes No. 39 (Revised)" on March 27, 2020, which stipulates that the tax treatment of digital asset transactions depends on the nature and purpose of the digital assets involved. The Hong Kong Inland Revenue Department will consider the rights and interests attached to the digital assets. The specific tax treatment depends on the nature of the assets, not the form of the assets.

It should be noted that currently Singapore and Hong Kong do not impose taxes on capital gains arising from the issuance, holding or disposal of cryptocurrencies. However, when distributing dividends, interest and other income derived from Singapore and Hong Kong to investors holding security tokens, the distributing institutions are required to withhold and pay withholding income tax on their behalf.

Last year, China's tax authorities began to impose taxes on some large companies and miners. What do you think of this phenomenon?

First, the modernization of tax collection and management methods. Tax authorities now have a relatively complete grasp of taxpayer data information. Through data comparison through risk assessment systems, it is easier to obtain tax-related data of enterprises or individuals in the industry with higher risks. On the other hand, international tax collection and management cooperation is also increasingly strengthened. Domestic enterprises and individuals’ overseas tax-related data information is exchanged back to China through intelligence exchange or technical means such as CRS and CBCR, which further improves risk assessment data and significantly enhances the tax authorities’ regulatory capabilities for enterprises or individuals in the industry.

Second, there is limited reference to international experience. At present, the tax authorities of major economies such as the United States, the United Kingdom and Japan have successively optimized the collection and management of cryptocurrencies, including the collection of income tax on the circulation and appreciation of cryptocurrencies. Although the legal basis for directly taxing cryptocurrencies in China is not complete and clear, according to the general provisions and legislative spirit of the Enterprise Income Tax Law and the Individual Income Tax Law, it is understandable that the tax authorities will tax the benefits obtained by enterprises and individuals in the industry on the cryptocurrency value chain.

The third is the inevitability behind the accident. There are many factors involved in the taxation of large users and miners. Although the basis for taxation needs to be further improved, cryptocurrency transactions themselves have economic explicitness. Combined with the idea that profits should be kept in the place where economic activities take place and value creation is taxed, the tax authorities have economic motivation and internal driving force to tax large users and miners. For those in the industry, they should make industry insights and regulatory judgments in advance, and be prepared in thought and behavior to cope with the ever-changing tax management in the future.

What tax advice do you have for Chinese cryptocurrency startups and individuals?

Web3 has brought about a large number of entrepreneurial opportunities, among which Chinese people occupy a very important position. Generally speaking, whether it is an institution or an individual carrying out an entrepreneurial project in any region, they must pay attention to tax compliance or the trend of tax supervision. The characteristics of the industry determine that many web3 practitioners run their own businesses across regions.

Tax compliance is not far from every Web3 practitioner. If you plan reasonably as early as possible, efficient tax arrangements will help your business prosper. Here are a few common suggestions for your reference:

1. Position your expectations: Understand your organization’s or your own views on taxation and what you expect to achieve;

2. Current environment: Understand the regulatory status and latest developments of cryptocurrencies in the region where your business is located;

3. Active planning: Rationally arrange your assets, teams, technologies, and businesses in different regions. Not only do you need to meet the tax compliance requirements of each region, but you should also make use of some active tax exemption policies as much as possible;

4. Reverse verification: Regularly review the status of your business, as well as its connection with tax supervision, and continuously manage it.

The above suggestions may seem empty, but in reality, entrepreneurs will think about the above issues at different stages. If conditions permit, it is recommended that cryptocurrency entrepreneurs communicate with relevant professionals on the above points as early as possible. I believe everyone will gain something in this process.

There are also rumors that there are cases of collecting taxes on USDT wages in China. What do you think of this phenomenon?

At present, it is a low-probability practice. There is still great uncertainty in determining whether the payer has a tax obligation when paying wages with USDT, or whether the payee has a tax obligation when receiving USDT wages. The latter has a legal basis for taxing wages and salaries according to the Individual Income Tax Law when receiving wages (regardless of the form, obtaining economic benefits of the nature of remuneration). However, when the former pays wages with USDT, the commodity attributes and currency attributes of USDT will affect the taxation. If USDT is used as a currency to pay wages, the basis for taxation in this link needs to be further improved; if USDT is used as a non-monetary asset to pay wages, this link is equivalent to barter, and taxation is reasonable according to current tax laws and regulations.

Even though local governments may impose taxes on the above-mentioned links during the tax collection and management process, such tax collection behavior is not representative and generalizable at the current stage, and it cannot be inferred that domestic tax authorities will demonstrate the legality and rationality of taxing cryptocurrencies at the top-level design level, because the principle of legal and legal taxation of taxable objects is unquestionable, and the bottom line of "nothing can be done without legal authorization" cannot be broken. We must look at this local tax collection behavior rationally and objectively. The process from point to line to surface will still take time, but relevant personnel in the industry can prepare and recognize in advance, re-sort out their own tax-related behaviors, and improve the compliance of transaction links as much as possible, plan ahead, and plan as early as possible.