Who Will Pay Taxes After the COVID-19 Stimulus?

Could 2020 be the year the world considers cryptocurrency taxation seriously? The coronavirus pandemic, after all, could cost the global economy as much as $4.1 trillion — or around 5% of global gross domestic product — as stated by the Asian Development Bank. COVID-19 consequences may lead governments to seek all possible sources to balance their budgets, including crypto, according to tax experts.

“At some point, somebody is going to have to pick up the bill for the COVID-19 pandemic and its associated economic stimulus packages,” Peter Brewin, a PwC tax partner in Hong Kong, said, adding: “We can expect revenue authorities to be under pressure to collect more taxes. I see no reason to believe that cryptocurrencies will be immune to this.”

In concord with this, on April 1, the Spanish tax authority began sending out warning notices to 66,000 cryptocurrency holders to remind them of their tax obligations. Richard Ainsworth, an adjunct instructor at Boston University’s School of Law, said:

“It’s the Willie Sutton question. Why do you rob banks? It’s where the money is. Clearly, untaxed money is in crypto. There will be activity, and it will be significant.”

Paul Beecy, a tax services partner at Grant Thornton, said that there is heightened awareness of cryptocurrency now in most parts of the world, and more attention might be directed toward taxing Bitcoin (BTC) and other cryptocurrencies this year.

But not everyone agree that COVID-19 will stimulate tax activity. Omri Marian, a professor of law at the University of California, Irvine, said: “The IRS and other agencies around the world will be stretched thin with the ‘direct’ tax fallout resulting from the pandemic, like administering relief programs.”

He added that there isn’t enough revenue to be collected from crypto assets to make them a major priority for tax agencies: “I expect tax enforcement in the context of crypto assets to be about the same, or lower, going forward.”

The crypto taxation issue

Cryptocurrency taxation has long been an issue. An individual in the United States, for instance, may have to pay a capital gains tax when buying a single cup of coffee with BTC. The U.S. is not unique in this regard. Grant Thornton’s Beecy regularly asks his non-U.S. colleagues about the situation with Bitcoin in their countries. Most, like in the U.S., have to monitor every purchase (at least theoretically), including cups of coffee.

“Yes, it’s a taxable disposition. Germany is an exception: Under rule 23 EStG, Germans can trade crypto tax-free — provided that their capital gains do not exceed a total of 600 euros per year,” he said. In Germany no capital gains are paid if the crypto is held for over a year.

As Brewin notes, “Most countries do not have specific tax laws for cryptocurrencies. Instead, they try to fit the taxation of crypto assets into existing tax laws and many have started to issue guidance on how they interpret existing laws.” This led to a problem of inconsistent treatment around the world.

Three tax structures

Brewin singles out three basic tax regimens in various global jurisdictions. Individual residents in Group 1 jurisdictions like the U.S. and the U.K. (by far the largest) should almost certainly keep records on all of their crypto spending and may have to pay taxes on any gains they have when they use their crypto to purchase goods or services. These countries use a broad-based capital gains tax, and Brewin thinks that “it’s very unlikely that such jurisdictions are going to make changes to their capital gains tax regimes to exempt crypto assets.”

Group 2 residents — like in Hong Kong or Singapore — enjoy an advantage over those in Group 1, as those jurisdictions do not levy taxes on capital gains. Thus, there is no need to maintain records or calculate tax on their gains/losses regarding crypto spending “as long as they are not deemed to be in a business of trading in cryptocurrency,” Brewin noted.

Group 3 jurisdictions such as Portugal and Malta do not require taxes, but this could change, depending on whether the current treatment has appeared by accident (i.e., the rules just haven’t been updated fast enough to incorporate crypto) or by design — meaning that an explicit government policy decision excludes the asset class.

For Group 3, crypto could be subject to future tax legislation — especially if governments would seek income in a post-COVID-19 world, Brewin noted, adding: “The tax treatment may differ depending on the type of asset — e.g., securities tokens may be treated differently from payment tokens like Bitcoin.”

“Not the best outcome for the tax guy“

“Crypto has special attributes that make taxing it very difficult,” stated Ainsworth, adding that, for example, it’s often hard to associate names with transactions. Taxing cryptocurrency mostly with an income tax — as opposed to a sales tax, or VAT — leads one inevitably to a property tax/capital gains outcome.

“So, David Hedqvist who just buys Bitcoins low (for Swedish Crowns) and sells Bitcoins high (for Swedish Crowns) has no VAT liability, just income tax,” Ainsworth said, speaking about the judgment in the Skatteverket v. Hedqvist case in the European Court of Justice and detailing:

“That’s not the best outcome for the tax guy because we can find the transactions much more easily than we can find the people behind them. The further trouble with the income tax is that we get most compliance from the withholding (and third-party reporting) systems. It’s really not a ‘voluntary compliance’ system. We comply because the government knows about us.”

The whole idea of crypto, though, is that ownership is (semi) anonymous, which may neutralize the withholding and reporting systems, noted Ainsworth, who was the former deputy director of the International Tax Program at Harvard Law School. He added: “Unless we want to spend a lot of enforcement resources connecting people to crypto, we are really not going to get anywhere fast.”

Ainsworth proposed, instead, to collect a withholding (per crypto transaction) from the cryptocurrency exchanges because in this case “it would not matter who was engaged in the transaction, or what was involved in the transaction, just that there would be a charge (tax) involved in each transaction collected and reported by the exchange. The charge would be a flat percentage.”

The Portuguese model

If crypto taxation is awkward, inconsistent and hard to enforce in most jurisdictions, are there still places that are getting it right? In Portugal, for example, individual crypto trades are not taxed — only trades from professional activities, that is, if crypto trading is a core business. Is this a better model?

The Portuguese way probably can not be applied to the U.S., said Beecy. Regarding Bitcoin, for example, “the IRS has already given guidance: This is property and it is subject to taxation.” Is the government suddenly going to change course — and exclude an entire asset class from taxation? That would be politically explosive, he maintained.

In most countries, tax outcomes for crypto assets are just a result of applying regular tax laws, said Marian. Most do not have a tax policy created exclusively for crypto assets, as it seems to be the case in Portugal. “The only countries that I am aware of that designed specific lenient crypto assets tax policies are all traditional tax havens, and this tells you all you need to know.”

Crypto tax after the COVID-19 pandemic —what is the endpoint?

Where, then, is the world likely to end up with regard to cryptocurrency taxation — if it is even possible to generalize? When the COVID-19 pandemic ends, Beecy expects to see in the U.S., and maybe other countries, a bifurcated tax scheme with a split between digital investors and digital consumers. The former will be subject to quite onerous reporting requirements, but they will get help with software packages which automatically track and consolidate transactional information of an investor — often linked to a digital wallet. The investor would be able to review all buys, sells, gains, losses, as well as consolidated monthly reports and annual reports, “just like the typical brokerage accounts.”

In the meantime, digital consumers will increasingly buy everyday goods and services with stablecoins, which, while taxable in theory, basically have no gains or losses to calculate. Crypto transactions — buying a shirt or a piece of pizza — will be fairly frictionless. Mazhar Wani, a PwC tax partner in San Francisco, agreed that stablecoins could play a role, saying:

“In the context of taxes, the key problem with using crypto assets for day-to-day spending lies in its volatility compared with the local currency. The obvious solution is adoption of a digital currency that doesn’t exhibit this volatility versus local fiat currency — some form of stablecoin.”

Wani would like to see jurisdictions begin considering crypto and digital assets through a fresh lens — i.e., not as a property, currency, security or commodity — with an end toward “establishing one globally consistent policy and framework around it with some sort of de minimis exceptions to be established locally to minimize burdensome compliance, reporting and enforcement activities.”

A role for the United Nations?

A more idealistic suggestion was created recently by Ainsworth and Tony Hu, a graduate student at New York University’s tax law program, in a working paper where they call for a supranational and trusted body such as the United Nations to administer tax revenues collected by a transaction tax on exchanges. Hu explained:

“For example, when a jurisdiction is battling opioid pandemic, a plight typically associated with cryptocurrency, it could apply to the administering body [e.g., the U.N.] for appropriate funds proportionate to the crisis’s scale and severity and use the funds to reduce instances of overdosing and develop more advanced technology to detect opioids at port of entry.”

A supranational solution? “I think that’s aspirational,” noted Beecy. “I understand it, but the challenge is: Will nations give up their sovereignty?” This would mean that countries would have to give up their right to tax the property of their citizens. Brewin, too, believes that most countries will try to retain all their tax privileges, and he does not believe that it will help reach global consensus on crypto taxation. The exception may be with regard to information reporting:

“I’d be very surprised if we don’t start to see tax authorities cooperating to require more disclosure from exchanges, custodians or wallet providers on their customers and then sharing this information with each other — for example via expanded applications of the common reporting standard.”

Beecy can see groups of central banks, like those in the European Union, creating unified policies to facilitate cross border digital currency transactions. But a crypto transaction tax with proceeds going to the U.N. to fight COVID-19-like pandemics or something similar to them? “I think that’s just a bridge too far,” he said.