Overview of Global Cryptocurrency Circulation Taxes.

Ajay110

Cryptocurrency transactions may involve not only income tax issues but also turnover tax issues. The tax status and future of cryptocurrencies will be analyzed from the perspective of turnover tax, aiming to provide relevant reference information for cryptocurrency investors. In comparison to turnover taxes, more countries are likely to continue using income taxes or other forms of taxation to levy taxes on cryptocurrencies.

Turnover Taxes and Their Main Categories
1.1 Overview of Turnover Taxes
A turnover tax is a type of tax that is levied on the turnover amount or quantity of goods or services. It is an indirect tax collected during the process of goods circulation.
Turnover taxes can be categorized into ad valorem taxes and specific taxes. Ad valorem taxes are based on the value or price of goods or services, such as value-added tax and sales tax. Specific taxes are based on the quantity or weight of goods or services, such as customs duties and resource taxes.
1.2 Main Types of Turnover Taxes
The main types of turnover taxes include value-added tax (VAT), sales tax, consumption tax, business tax, and customs duties.
Value-added tax (VAT) is a turnover tax that is levied on the value added to goods or services in the process of production, circulation, and consumption, reflecting the true value added to goods or services.
Sales tax is a turnover tax levied on the sales amount or price of goods or services. It is levied in the final sales stage of goods or services and only involves the final consumers. The United States is a typical representative country that levies sales tax, and whether to impose sales tax and how to set the tax base and tax rate are determined by individual states and local governments.
Consumption tax is a turnover tax levied on specific goods or services in the production, import, or sales stages. Unlike VAT, consumption tax typically targets specific goods such as cigarettes and luxury items. Its purpose is to adjust consumption patterns and promote conservation and environmental protection.
Business tax is a turnover tax levied on the turnover obtained from providing services, transferring intangible assets, or selling real estate. Business tax was an old turnover tax in China and was replaced by VAT in 2015.
Customs duties are turnover taxes levied on goods and items imported or exported and are only collected at the time of entry or exit.
Capital gains tax does not fall under turnover taxes because it is not collected during the production, circulation, and consumption stages of goods or services but rather during the transfer or transaction of assets.

Cryptocurrency Turnover Taxes
2.1 Taxes Generated During Cryptocurrency Circulation
Cryptocurrency turnover tax refers to the tax imposed on transactions or activities using cryptocurrencies. Generally, cryptocurrencies are not subject to consumption tax due to their lack of luxury or ""harmful goods"" characteristics. They are also not subject to customs duties because they are digital assets rather than physical goods. The IMF's working paper ""Taxing Cryptocurrencies"" published in July 2023 focuses on this scope of discussion. Therefore, cryptocurrency turnover taxes mainly include VAT and sales tax. This article attempts to provide a brief analysis of the VAT and sales tax on cryptocurrencies in major countries worldwide.

Different countries or regions may have different definitions, classifications, and taxation methods for cryptocurrencies, so cryptocurrency investors need to refer to turnover tax regulations in their respective jurisdictions.

2.2 Countries and Regions Imposing Turnover Taxes on Cryptocurrencies
Currently, most countries and regions do not impose turnover taxes on cryptocurrencies, which is related to how cryptocurrencies are legally defined. Only when cryptocurrencies are defined as ""goods"" or ""assets"" may they be subject to turnover taxes. Countries and regions that consider cryptocurrencies as ""currency"" do not impose turnover taxes on cryptocurrencies.
This article briefly outlines representative countries and regions that levy turnover taxes on cryptocurrency-related transactions, as shown in the table below.

2.3.1 Cryptocurrency Turnover Taxes in the European Union (EU)
The EU leads the regulation of cryptocurrency turnover taxes internationally. As early as the Hedqvist case in 2015, the European Court of Justice ruled that the exchange service between legal tender and Bitcoin constitutes taxable services subject to VAT.
In the Hedqvist case, a Swedish resident named Hedqvist intended to provide exchange services between legal tender and Bitcoin. The Swedish Administrative Court submitted this case to the European Court of Justice to determine whether the value-added obtained by Hedqvist from this exchange service should be subject to VAT. The European Court of Justice held that since Bitcoin is not a tangible asset, the exchange between legal tender and Bitcoin is not a payment for goods but a payment for services, and Hedqvist and the coin exchange formed a ""consideration"" in the transaction. Therefore, the European Court of Justice determined that the exchange service between legal tender and Bitcoin falls under Article 2(1)(c) of the EU VAT Directive as taxable services.
At the same time, the European Court of Justice believed that Article 135(1)(e) of the VAT Directive applied to the exchange of cryptocurrencies, so it can be inferred that exchanging legal tender for cryptocurrencies is exempt from VAT.
As a result of the Hedqvist case, EU countries are influenced by this precedent and include the exchange between legal tender and cryptocurrencies, as well as the exchange between cryptocurrencies, in the scope of VAT taxation, but exemptions may apply. However, for mining businesses, the situation is different: except for France, most countries (such as Germany, Ireland, Sweden, etc.) consider mining businesses not subject to VAT.

2.3.2 Practices in Other Countries
European countries outside the EU have generally adopted the relevant spirit of the European Court of Justice's judgment on the Hedqvist case, such as the UK and Norway. Countries outside Europe generally adopt a similar approach to Israel, excluding virtual currency exchanges from the scope of VAT taxation; however, these countries treat the purchase of goods or services with virtual currencies as taxable sales (i.e., subject to VAT). As for the treatment of mining for VAT, policies are more diverse and have not yet formed mainstream opinions.
Another design approach for taxing cryptocurrencies is to completely exempt turnover taxes and instead regulate through income taxes. Countries like Singapore, Japan, South Africa, and Hong Kong SAR are typical examples.

3.Future Prospects of Cryptocurrency Turnover Taxes
A unified standard and regulation for cryptocurrency turnover taxes have not yet been formed globally. Different definitions, classifications, determinations, tax bases, tax rates, etc., for cryptocurrencies exist among different countries and regions, leading to the complexity and uncertainty of cryptocurrency turnover taxes.
Currently, most countries and regions tend to categorize cryptocurrencies under income taxes, taxing the income generated from buying, selling, exchanging, gifting, donating, etc., involving cryptocurrencies. This article believes that compared to turnover taxes, more countries are likely to use income taxes or other forms of taxation to levy taxes on cryptocurrencies in the future. This is because income taxes are more convenient for collection and calculation compared to turnover taxes. Income taxes can better adapt to market fluctuations and innovations in the cryptocurrency market, avoiding tax losses or excessive taxation due to price uncertainty or product diversity. They can also coordinate different tax systems among countries and regions, prevent international double taxation, and promote cross-border transactions. Therefore, income taxes can better reflect the value changes of cryptocurrencies and taxpayers' ability to bear the burden compared to turnover taxes. In contrast, turnover taxes have some problems and challenges in terms of collection costs, effectiveness, fairness, etc.

Jayne94133

It does seem quite complex.