In the U.S., the IRS is progressively clarifying the ambiguity persisting on the taxation of cryptocurrencies, as illustrated by the recent publication of a fairly detailed FAQ. In parallel, the U.S. tax administration is carrying out numerous tax audits.
In Europe, while no state has shown hostility, very few are those that have adopted a fiscal environment that encourages a positive development of cryptocurrencies.
To understand taxation of cryptocurrencies in the EU, it must be kept in mind that the EU has no power over direct taxation (however, VAT is an EU matter, which explains the ECJ's decision that bitcoin-fiat trade is exempt from VAT). Thus, each member state freely sets its own tax rules at national level. This is a problem in a single market, but it is as old as the EU.
Within this patchwork of tax regimes, it is still possible to identify key trends and opportunities.
Key Trends in Taxation of Cryptocurrencies
First, it should be noted that in all states, the tax treatment of bitcoin gains is closely linked to the country's tax system. Where no specific regime is provided for, cryptocurrencies fall into pre-existing tax categories. Naturally, countries with favorable capital taxes only slightly tax capital gains on cryptocurrencies. Switzerland (outside the EU but within the European Economic Area) does not tax income from private wealth management. The United Kingdom foresees fairly low flat rates (10 percent or 20 percent). The Netherlands provides for a rate of 30 percent, which, however, only applies to notional interest, i.e., a fictitious amount of income generated by the capital held.
Example from the Netherlands: A person holds 100 BTC (worth €320,000) on January 1, 2019. To calculate its tax base, it first applies an allowance of €25,000 and then a notional rate of income that its capital should generate, as determined by law. According to this rate, the tax base will be €13,570 subject to a 30 percent rate. The tax payable for the year 2019 will, therefore, be €4,071, regardless of the number of transactions carried out during the year.
Then, it should be noted that, as in the United States, almost all member states consider any transfer of cryptocurrencies, regardless of the counterpart (other crypto, fiat, good or service) constitutes a taxable event. This is due to the fact that cryptocurrencies are legally considered as a good and not as a currency.
This distinction constitutes an obstacle on two levels: On the one hand, it creates several difficulties in calculating its capital gain when many crypto-to-crypto exchanges have been conducted; on the other hand, it makes it impossible to use cryptocurrencies in payments since each payment, however slight, involves calculating the capital gain or loss realized in each caset.
In this regard, it is worth noting that France has decided to exempt crypto-to-crypto trades in order to facilitate taxation by reducing reporting obligations and taxing only exchanges against fiat or purchases.
Example from France: A person holds 10 BTC worth €50,000 at time of purchase. She later decides to change them against 300 ETH which are then worth €60,000. Before 2019, a capital gain of €10,000 should have been declared. Today, this exchange has no tax implications. If that person then decides to sell her 300 ETH for €65,000, she will have to declare a capital gain of €15,000.
Finally, quite logically, all member states differentiate, for the purpose of determining the applicable tax regime, between persons acting in the context of the private management of their assets and individuals acting as professionals.
Most cryptocurrencies are liquid and easily tradable, so the number of transactions that an individual can make is often very high. The criteria to distinguish a professional from a private individual are, therefore, decisive because the taxation of professional activities is often much higher. Indeed, while all member states provide for a flat-rate tax for individuals (from 0 percent to 35 percent), income from professional activities is almost always subject to a progressive rate (up to 55 percent) to which are added social contributions.
Although the member states present points of convergence in their taxation systems, the various regimes can be opposed in their practical application.
First, while all member states agree on distinguishing between professionals and individuals, there are significant differences in the criteria used to determine the distinction. Some states provide for purely formal criteria, such as the incorporation of a company to carry on the activity (Austria, Croatia, Greece, Hungary, Ireland). Others provide for more or less severe material criteria, involving a case-by-case analysis of the frequency, duration of positions, amount of trades, resources used, etc. (Germany, France, Belgium, United Kingdom, Luxembourg, Switzerland). Thus, a person who has carried out more than €500,000 of own-account trades over the year will probably be considered a professional in France and Belgium, but an individual in Austria and Ireland.
Then, the regimes are different in terms of applied rates, a distinction that is not specific to cryptocurrencies, however. The rates are around 10 percent in the East and 30 percent in the West (see Figure 1).
Finally, the analysis of rates alone would not give a true and fair view of the tax situation. Thus, several states have notable specificities. Besides the Netherlands mentioned above, the United Kingdom provides, for example, for a £11,300 allowance on capital income in addition to the general allowance of £12,500.
Example from the United Kingdom: A person earns £40,000 per year and has a £25,000 bitcoin capital gain for a total income of £65,000. A first allowance applies to total income (£12,500) and the allowance on capital gains also applies (£11,300). Therefore, the overall income for the determination of the applicable rate is (£40,000 - £12,500) + (£25,000 - £11,300) = £27,500 + £13,700 = £41,200. As the income is less than £45,000, the capital gain in bitcoin will be taxed at a rate of 10 percent after deduction. The capital gains tax will, therefore, be in the amount of (£25,000 - £11,300) x 0.10 = £1,370.
Opportunities vs. Security
That being said, a simple analysis of existing law is not enough to determine the quality of a tax system. While several European countries can now be presented as crypto-tax havens, these privileged regimes often result from unintended consequences of tax law enforcement. Thus, the security resulting from the benefit of a dedicated system can sometimes be preferred.
Cryptocurrency Tax Havens
Among the countries presented as particularly favorable to cryptocurrencies for tax purposes, it is usual to mention, on the one hand, Germany. German regulation theoretically provides for capital gains on bitcoin to be taxed at a rate of 26 percent, but capital gains are totally exempt when the cryptocurrencies sold have been held for over one year. Germany thus appears as a tax haven for holders.
On the other hand, several states provide for a total exemption for gains made in the management of private assets, including capital gains on bitcoin. This is the case in Portugal, Switzerland, Belgium and Slovenia. However, this exemption can quickly be erased if the activity is classified as professional. Thus, someone who trades frequently, say, on a weekly basis, will pay more capital gains taxes. In Belgium, for example, the rate would rise from 0 percent to 33 percent. In Switzerland, on the other hand, taxation will only take place in very specific circumstances, particularly in the event of multiple short-term positions, borrowing and insurance to guarantee its positions.
Cryptocurrency Specific Frameworks
Finally, it should be pointed out that only France has adopted a regime dedicated to so-called "digital assets" that tries to take into account their specificities.
For example, as noted above, France decided to no longer consider crypto-to-crypto trades as taxable events. To summarize, capital gains or losses should only be recorded at the time of the transfer of cryptocurrencies against fiat, a good or a service. The capital gains and losses for the year offset each other. Potential capital losses cannot be carried forward to the following year. Any capital gain must be declared annually and will be taxed, after the deduction of a €305 allowance, at a flat rate of 30 percent, including social security contributions. Finally, all trading platforms used must be reported to the administration.
Although it presents many points for improvement (high reporting requirements, tax rates), this system is a first step toward taking into account the reality of the sector and adapting the law to its specific features.
To conclude, the taxation of cryptocurrencies in the EU cannot be approached as a whole. While taxation is currently the preferred tool for competition between member states, including for attracting companies in the crypto sector, we can only hope that the proximity of member states' tax systems and policies will probably lead to gradual homogenization.
In the meantime, while it is absolutely possible to Live on Bitcoin in Europe, as Bitcoin Magazine’s Colin Harper did, the experience will be much more difficult, given the complexity and disparities between European tax systems, to meet the many reporting obligations that this lifestyle will generate.
This is an op ed by Alexandre Lourimi. It is provided for informational purposes only and should not be construed as tax or legal advice. Readers are cautioned to research tax implications in their own specific cases and consult with a tax professional. Opinions expressed do not necessarily reflect those of Bitcoin Magazine or BTC Inc.