With a global market cap of $1.36 Trillion, the cryptocurrency industry has one of the world’s most unstable taxation structures. The one-billion-dollar question now is, why the need to tax cryptocurrency transactions?

Tax is a crucial and highly effective fiscal policy instrument of the government used in regulating the economy. It is used to generate revenue for governments primarily used to fund her infrastructures and programs.

Below are the broad categories of taxable cryptocurrency transactions:

Trading & Investments

This includes all crypto activities that involve buying, selling and holding cryptocurrencies for investment and/or trading purposes. Examples are spot trading, margin trading, crypto-to-crypto trading, lending and borrowing, and staking.

Use as Currency

This includes all cryptocurrency activities that involve making purchases, paying for services and conducting transactions with the use of cryptocurrencies. An example of this use case is peer-to-peer transactions.

Implication of taxes to cryptocurrency transaction

If we could adequately tax cryptocurrency transactions, these are the categories each may fall into:

Capital Gains Tax

Cryptocurrencies are often treated as property/intangible assets. Thus, making them subject to capital gains tax when exchanged or sold. This form of tax is applied to the profit realized from the sale of cryptocurrency. Depending on the duration of retaining the digital assets, capital gains taxes can be categorized into two types:

a) Long-Term Capital Gains Taxes apply to crypto assets held for over a year and are often taxed at a lower rate.

b) Shor-Term Capital Gains Tax apply to assets held less than a year and are often taxed at a higher rate.

Income Tax

This form of tax applies to cryptocurrencies received as income through sources such as mining, staking and payment for services. Its value at the time of receipt is used to determine the taxable amount.

What is so complex about taxing cryptocurrency?

Below are the major complexities faced while assessing the taxation structure for crypto transactions:

Value Volatility

The slippery and volatile nature of crypto-asset value presents a major challenge when determining the fair market value. This can pose a major challenge when the valuation is to be used for tax reporting.

Anonymity & Pseudonymity of Transactions

The cryptocurrency ecosystem offers a high degree of privacy to users and their activities. This makes it hard for tax authorities to attach various wallet addresses to real-life identities. This also opens an ample window for tax evasion and tax avoidance.

Complexity in Book-Keeping

For record-keeping and reporting, traders who engage in frequent cryptocurrency transactions are required to carefully record/document each transaction (which includes the transaction date, value and purpose). The volume and frequency of transactions can make it extremely hard to track all instances of maleficence.

Cross-Border Transactions

Since cryptocurrencies are not restricted by geographical boundaries and borders, it is very difficult for tax authorities and agencies to track cross-border transactions. Hence, these transactions can pose regulatory issues for those parties involved.

Crypto-to-Crypto Transactions

Fundamental tax systems deal in fiat-to-crypto transactions which are quite easy to track and record. However, crypto-to-crypto transactions are hard to account for, while possessing challenges while assessing tax liability.

International Tax Regulatory Standards Variation

The tax regulatory system for cryptocurrencies varies from country to country, thereby, creating uncertainty for taxpayers and tax authorities. These differences can affect the various treatments for cryptocurrency taxation.

In summary, the complexity of taxing the cryptocurrency ecosystem is due to the technology's volatility and decentralized nature, making it difficult to adopt a universally acceptable taxation structure. Thankfully, governments all over the world are working on implementing taxation measures associated with crypto transactions because of the recognized future potential of blockchain technology and its ability to drive financial prosperity.