When Bitcoin was still deeply buried underground in the world of unknown technology and the dark web, it was hardly seen as a threat, or even legitimate by those in power. However, it soon proved many in the mainstream wrong as it’s popularity and price skyrocketed.

Both of these factors have caused regulators and governmental institutions to sit up and take notice. But more than that, they have been forced to take action in response. Regulators are indeed catching up to Bitcoin, as more and more hard-nosed approaches begin to make the news. It now looks as if the taxation authorities of some countries are also starting to get to grips with this fast moving, and mostly anonymous, monetary system/growing asset.

Just like death and taxes

It is hardly confusing as to why the tax man would want to come knocking on the Bitcoin community’s door. The power of this digital currency, along with others, has handed huge amounts of growth and prosperity to investors, prosperity that has up til now, been largely kept off the grid.

The amount of money, growth, and returns on investment mean that there is room for governments to stake their claim, but their methods in doing so are far more difficult in the grey area of crypto earnings. In normal circumstances, banks and other centralised financial institutions are obliged to disclose finances to taxation authorities. However, the same cannot be said for Bitcoin. There is currently no obligation on exchanges to disclose user information. In fact, it is unconstitutional in most settings, as the USA’s Internal Revenue Service (IRS) found out when they requested data and were turned down by the courts.

Additionally, Blockchain offers a transparent window into wallet addresses and transactions, but with anonymous IDs, these are no good to anyone trying to track down the owners of funds and their respective growth. This is also why there is a widely held fear of money laundering in the Bitcoin world.

How do they do it — from US to Australia

Given the difficulty in pegging down Bitcoin assets, different nations are trying different methods to try and claim tax from profits made by Bitcoin investors. The IRS, for example, has tried asking people nicely to declare their tax, and only 802 listened. The reset merely scoffed and remained in the shadows.

In Australia, the government has deemed that cryptocurrencies are “a form of property”, and therefore: "Any financial gains made from the selling of Bitcoin will generally be subject to capital gains tax (CGT) and must be reported to the Australian Tax Office," a spokesperson from the tax office said.

While this is still a grey area, there has been a warning issued. The Australian Tax Office has warned it will be looking out for tell-tale signs of crypto tax dodgers living beyond their means:

"The Australian Tax Office is here to help those that are genuinely trying to meet their tax obligations. However, where people attempt to deliberately avoid these obligations, we will take strong action."

This includes using "a range of existing powers" which are used to address "unexplained wealth and conspicuous consumption that may arise through profits derived from cryptocurrency investment".

The South African Revenue Services (SARS) said in December last year that it would be exploring ways in which to track cryptocurrency trades in the hopes of addressing tax avoidance. In the meantime, it is looking to provide its own guidance for citizens on the tax treatment of cryptocurrencies, its first foray into controlling the gains made. As Asheer Jaywant Ram, senior lecturer in the School of Accountancy at the University of the Witwatersrand, puts it:

“I think there is enough interest and enough scope for SARS to be looking into this space, but now the question becomes, are they really going to accept taxpayers declaring their gains as capital gains tax or are they going to just say it is all revenue in nature?”

Income or capital?

This is a key question that a lot of nations will have to put to the sword as, should it be taxed as income, as opposed to capital, it will be at a higher rate. Proving that it was indeed a long-term investment, and thus subject to gains tax, is far more difficult in the fast moving ecosystem that is Bitcoin. Ram adds:

“Those sorts of debates on the nature of Bitcoin – I think those are coming – and I think it would be very interesting to actually see the outcome of those debates”

It is the very nature of cryptocurrencies that as they emerge more in the mainstream, they will be subjected to more scrutiny and regulations. While Blockchain and cryptocurrencies are a disruptive force, scaring longstanding institutions such as banks, it is doubtful that they will be able to avoid tax forever. It would be more pertinent for a resolution to be met between tax authorities and crypto investors, lest there be bigger issues down the line.