Xiamen National Accounting Institute: Ideas and suggestions for taxing cryptocurrencies in my country

author   |   Mengya Zheng, Keke Wang, Zhenni Wang, Huqin Yan: Xiamen National Accounting Institute, Xiamen, Fujian

Wu said that the content was excerpted. Recently, the article "Exclusive: Several Large Cryptocurrency Accounts in China Are Subject to Tax Audits for Individual Income Tax" has caused a lot of discussion. Therefore, I would like to share this article. This paper is currently a relatively comprehensive article on how to tax cryptocurrencies in China.

The content is as follows:

On January 3, 2009, the first Bitcoin was born, which was also a creative move for the transition of currency from the credit currency era to the decentralized currency era. The taxation of Bitcoin in various countries was compared in order to learn from my country's taxation methods on Bitcoin, a cryptocurrency.

Tax practices of various countries on Bitcoin

USA

In 2014, the U.S. Internal Revenue Service officially started to levy taxes on Bitcoin. The U.S. Cryptocurrency Tax Notice (IRS Notice 2014-21) first stipulates that the tax payment process includes the sale of cryptocurrencies, the purchase of goods and services, and the holding of cryptocurrencies, and then stipulates the corresponding specific tax obligations according to the tax payment process.

In the Bitcoin issuance stage, that is, "mining" to obtain income, the fair value on the date of acquisition is used as the basis for tax calculation. If the mining behavior forms a business, the individual must pay individual business tax. In the Bitcoin transaction stage, when Bitcoin is used as a means of payment to purchase goods or services, the party accepting Bitcoin uses the fair value on the date of acceptance as the tax basis to calculate the income tax and consumption tax payable. The payer calculates the tax based on the difference between the market price of Bitcoin and the goods and services. In the Bitcoin holding stage, the tax type is determined according to the length of holding time. If the holding period is more than one year, capital gains tax is paid, and the tax rate is between 0% and 20%. If the holding period 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%. The capital gains tax in the United States is lower than the income tax rate. This regulation shows that the US government encourages long-term holding of cryptocurrencies such as Bitcoin.

Although the United States has formal regulations on how to tax Bitcoin, due to the anonymity of Bitcoin, the government has no way of knowing transaction records and taxpayer information. Many people do not report Bitcoin-related income, making it difficult to collect taxes. In 2016, the IRS required the US exchange Coinbase to provide it with some personal information of its users. In 2019, the IRS 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.

U.K.

In the early days of cryptocurrency development, the UK imposed a 20% VAT on it. This was not conducive to its development in the UK, and the UK subsequently issued tax rules for cryptocurrencies in 2014. HM Revenue and Customs defines Bitcoin as personal property, with relatively few related tax obligations. It believes that mining is not closely related to the acquisition of income, so this link is exempt from VAT. Bitcoin does not need to be exchanged for other legal currencies. Individuals need to pay capital gains tax on the income from transactions using Bitcoin, and companies need to pay corporate income tax. In 2019, the UK updated the rules for taxing crypto assets, and the tax authorities listed the cryptocurrency-related behaviors that would generate tax obligations. Mining activities are deemed to be taxable, and companies that obtain Bitcoin by providing goods or services are also taxable.

Japan

Japan has the highest acceptance of digital cryptocurrencies such as Bitcoin, which is a legal payment method. In the early days, Japan imposed an 8% consumption tax on taxpayers who purchased such currencies. In September 2017, Japan abolished the consumption tax on Bitcoin and included the income from Bitcoin transactions in other income, and added it to salary income, dividend income and other income for comprehensive taxation. When an individual's other income exceeds 200,000 yen, a confirmation declaration is required. Income tax should be calculated based on the difference between the selling price and the purchase price. Due to the frequent changes in Bitcoin prices, the purchase 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 transactions is higher than that for stocks. The tax rate is determined according to the total income, ranging from 5% to 45% (without the 10% resident tax). No tax is paid during the holding period of Bitcoin.

Australia

Australian Taxation Office's viewpoint: Trading in Bitcoin is equivalent to bartering, and the tax rules should be similar. Bitcoin is not a legal tender, but an asset for the purpose of capital gains tax. The Tax Collection Notice on Cryptocurrency stipulates that the collection of income tax on such assets should be determined based on the purpose of holding. Taxpayers who purchase goods and services with Bitcoin are subject to consumption tax and income tax. The consumption tax on digital cryptocurrencies was abolished in 2017. Taxpayers can purchase goods or services tax-free with cryptocurrency costing less than $10,000 and use them for their own use. Cryptocurrencies held for investment purposes are not tax-free. Mining income is subject to income tax. Starting July 1, 2018, the tax rules for foreign currencies will apply to Bitcoin.

Countries have not reached a consensus on the attributes of Bitcoin. Even different groups in a country have very different definitions of Bitcoin. The taxation of Bitcoin is still in its early stages. Tax policies are not standardized and mature, and they change frequently. As a result, many taxpayers are not clear about their tax obligations related to Bitcoin, which brings great difficulties to tax collection and management. The results of the implementation of relevant tax policies are not ideal. However, if cryptocurrencies are to be legalized in the future, it is essential to formulate a tax system that matches them.

Ideas on Tax Collection and Administration of Digital Cryptocurrency in my country

After the release of the Notice on Preventing the Risks of Token Issuance and Financing in 2017, the exchange of digital currency and legal tender in China was completely stopped, and its circulation and sale in my country were prohibited. However, the country supports the blockchain technology used by digital currency.

At present, my country can only restrict the circulation and sale of Bitcoin, but cannot prohibit the production, i.e., the "mining" link. In addition, Bitcoin is anonymous, and users can trade it abroad. Therefore, the circulation of Bitcoin is very active, and failure to impose taxes on it will result in the loss of tax sources. Although the country prohibits the circulation of Bitcoin out of consideration for Bitcoin speculation, it is feasible to impose taxes on the "mining" link. In addition, many countries in the world have gradually relaxed their supervision of Bitcoin. my country should adopt a cautious and tolerant attitude to allow Bitcoin to develop in a standardized manner under supervision. Therefore, it is very necessary to consider taxing the transaction and payment links of Bitcoin.

From production to circulation, Bitcoin involves multiple tax links, the transaction activities are relatively complex, and many entities are involved. Based on the existing tax framework, this article puts forward tax suggestions for Bitcoin from three aspects: "mining", circulation, and sales.

Mining

"Mining" refers to the process of each user using a computer to guess the hash value of the previous block in order to obtain the right to write to the next block. The income from "mining" can be divided into two parts: one is the bitcoin income that the system pre-sets as a reward to users who obtain the right to write; the other is the handling fee income. "Mining" itself is the use of computers to solve mathematical problems, so the taxpayer's "mining" behavior can essentially be seen as guaranteeing the information on the entire blockchain. Therefore, the reward income obtained by the taxpayer can be regarded as service income; the handling fee income can be regarded as the income collected by users who do not obtain the right to write from users who obtain the right to write.

According to the essence of the business, the "mining" link needs to be levied with 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 costs of "mining" that constitute input tax are the cost of purchasing special computers, electricity fees, site fees, etc., which can be handled with reference to the current provisions of my country's value-added tax. However, the mechanism of obtaining Bitcoin means that "mining" behavior may not necessarily 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 that cannot be deducted should be transferred out. The tax base for the output tax of the "mining" link should be divided into reward income and fee income. For reward income, the fair value of Bitcoin on the day of obtaining the reward is the tax base for the output tax; for fee income, the full amount of fee income can be used as the tax base.

Secondly, the collection of income tax for the "mining" link can be discussed from two perspectives: individual and corporate. As mentioned above, the "mining" behavior can be regarded as a kind of credit guarantee. According to the provisions of the Announcement No. 74 of 2019 of the State Administration of Taxation, individuals who obtain guarantee fee income need to pay personal income tax according to the "incidental income" item. Therefore, the income obtained from the "mining" behavior can refer to the above provisions and pay personal income tax. If the company "mining" initially obtains Bitcoin, the fair value of its rewards and handling fees will be used as the tax base, and the mining costs of the company will be confirmed at the same time to calculate the taxable income.

Circulation Link

The circulation link refers to the behavior of enterprises or individuals using Bitcoin to buy and sell goods or services. Value-added tax and income tax can be levied at this link. At present, the value-added tax in the circulation link is generally regarded as a "barter" behavior, that is, the buyer and seller make purchases and sales transactions with each other. However, due to the anonymity of Bitcoin, the basis for tax calculation cannot be reliably measured, so the tax authorities can levy taxes by assessing and collecting taxes. In addition, the government can regulate the circulation of Bitcoin by establishing a unified exchange, which is also conducive to the acquisition of tax information.

Regarding the collection of income tax, the Enterprise Income Tax Law regards the exchange of non-monetary assets as sales, so the income obtained from the purchase and sale of Bitcoin is taxable income. Individuals' "barter" can be regarded as property transfer and pay personal income tax.

Sales

The selling stage refers to the act of an organization or individual selling bitcoins obtained through "mining". At this stage, value-added tax and income tax need to be levied. For value-added tax, the output tax should be confirmed based on the fair market value of bitcoins on the day of sale. At the same time, the seller should establish a detailed flow record of bitcoins, adopt the first-in-first-out method, and use different tax bases for bitcoins obtained through different channels to deduct input tax, and pay attention to avoiding double taxation.

For income tax, the income should be recognized on the day of selling bitcoins, 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 corporate income tax, attention should be paid to the issue of loss compensation.

Ideas on Tax Collection and Administration

Cryptocurrencies represented by Bitcoin are developing rapidly, and blockchain technology is also highly professional. At present, tax authorities have not formed a clear understanding of cryptocurrencies, so there may be difficulties in tax collection and management. The biggest problem in taxing cryptocurrencies is the acquisition of tax information. In this regard, this article proposes the following ideas:

1. The government should establish a standardized digital cryptocurrency trading platform. Due to the anonymity of digital cryptocurrency, tax information is difficult to obtain. The government should establish a unified trading platform to solve the taxation problem caused by anonymity. However, at the same time, digital cryptocurrency also loses its decentralized and anonymous characteristics, and the privacy protection of taxpayers is also a problem worthy of attention.

2. Tax authorities should improve the monitoring system, conduct real-time monitoring of each link, assess the value of digital cryptocurrencies held by taxpayers, require mine owners to declare tax information, implement withholding and prepayment, and settle taxes at the end of the year.

3. As the international circulation of digital cryptocurrencies is very convenient, tax authorities should pay attention to international cooperation and sharing of tax-related information when collecting and managing taxes, prevent international double non-taxation, avoid international double taxation, and better promote the development of the digital economy.

Summarize

With the continuous development of technology and economy, digital currency has become more mature. It is necessary to levy taxes on digital currency. At present, the tax collection and management of digital currency varies from country to country. my country needs to combine the current national conditions, learn from the practices of other countries in the world, and establish a tax collection mechanism for digital currency as soon as possible from the two aspects of tax law and tax collection and management to better serve the digital economy.