Why Bitcoin Taxes and Regulations Are A Good Thing

Why Bitcoin Taxes and Regulations Are A Good Thing

In the midst of Bitcoin’s recovery, regulatory uncertainty continues to cloud the crypto sector. New and unclear Bitcoin taxes negatively impact the opportunities for mainstream adoption of all cryptocurrencies. 

Let’s consider these events at a time when U.S. lawmakers are placing a halt on Facebook’s cryptocurrency project, Libra. Continuous threats of new regulations have already turned Bitcoin and its wildly fluctuating price patterns into an investment that may no be trustworthy after all.

But let’s take a small step back to put it all in context…

In 2008, Satoshi Nakamoto published the Bitcoin whitepaper. This document came at a time when the world was facing a major financial crisis, triggered by some of the biggest banks. As people lost their homes, their trust in the banking system also diminished.

The launch of Bitcoin was meant to bring a new, decentralized financial system. A system that Satoshi envisioned would protect consumers from the whims and fancies of traditional financial institutions. You can read more about this in the History of Bitcoin.

So, 10 years after the introduction of Bitcoin to the world – has Nakamoto’s goal been achieved?

Admittedly, there have been positive changes, and Bitcoin is continuing to gain traction as a global currency. 

However, not everything has unfolded the way the creator intended. Bitcoin was supposed to be a censor-proof digital currency, free from any third-party control, whether that be by government or financial institutions.

What’s the big deal with regulations and bitcoin taxes?

Bitcoin’s place as the top cryptocurrency has prevailed over the years. Many still think of it as the digital replacement of traditional currencies.

Increased usage and network maturity are usually cited as top reasons for Bitcoin’s growth so far. However, this doesn’t mean it hasn’t shown drawbacks.

To start, global governments, with the exception of a few countries, have shown an open distrust towards Bitcoin. A primary reason for this has been a lack of regulatory clarity. 

On top of that, Bitcoin has also been hit by numerous scams and thefts which have seen more than $4 billion worth of BTC either lost or stolen since 2011.

bitcoin taxes

While authorities have focused on the need to regulate cryptocurrencies, the responsibility often falls on wallet providers and crypto trading platforms, that act as intermediaries. 

A lack of supervision of these intermediaries poses a real threat to investors, as it puts them at risk of fraud and scams. 

To show this with a simple example, a major crypto exchange’s founder passed away and took the private keys for the exchange’s wallets with him. This left thousands of users with nothing more than a cautionary tale to warn others with.

Why bitcoin shouldn’t be the wild, wild west 

Lack of clear regulation has not only led to huge amounts of lost funds, but also to illicit activity. In the digital age, criminal organizations host their work online and are often leveraging cryptocurrency’s pseudo-anonymity to engage in illegal activities. Here’s an example:

ethereum scammers

Have you ever seen Ethereum giveaway posts on Twitter? Been asked to invest in an ICO for a company that will revolutionize the world (hint: Bitconnect)?

Some time back, a U.S. Senate Committee held a hearing on crypto regulations, focusing on whether current policies and regulations sufficiently tackle the crypto industry.

The committee heard how regulations that apply to traditional banks and funds could also be applied to the growing cryptocurrency sector.

The reason lawmakers are scrambling to introduce regulations now is mostly due to Libra, Facebook’s upcoming cryptocurrency project. The authorities are aware of the lack of clear regulations and are trying to understand the potential threat that Libra may pose to the world’s financial systems.

bitcoin taxes

While the initial reaction to cryptocurrencies is often negative, it is good news for crypto enthusiasts that lawmakers are trying to look at the wider picture instead of simply banning cryptocurrencies outright. After all, when have bans and witch hunts ever succeeded in silencing the voice of the people?

Better regulations lead to more adoption

The number of companies accepting crypto as payment has shot up in the last couple of years. Behemoths like Microsoft and Overstock, among others, started accepting Bitcoin payments from as early as 2014. 

Recent patterns show that more clarity on Bitcoin regulations, and especially taxes, has convinced companies that it is now safer to invest in or accept crypto.

You can see in this article, just how many companies are now open to receiving Bitcoin as a form of payment.

Moreover, clear regulations have also begun to streamline the crypto sector in several countries and jurisdictions around the world.

Companies are already finding it easier to set up businesses in countries with unambiguous regulatory frameworks related to cryptocurrencies. 

One example is U.S-based Circle Financial, which used to own the Poloniex exchange (now sold to the Tron foundation). The firm moved a part of its crypto exchange operations to Bermuda, to better provide its services to its users. 

The fact is that, with better and more straightforward regulations in the U.S., Circle wouldn’t have had to do this.

Unlike the US, Japan is taking leaps of progress, as it has been doing a great job with its regulatory framework for Bitcoin. They even legalized the coin as a mode of payment back in 2017. 

The same could potentially happen in China, one of the biggest markets for crypto and blockchains, even though the use of cryptocurrencies as a mode of payment or for trading is banned there. 

Chinese authorities are reportedly looking into crypto with an eye on the Stablecoin market. When a country of China’s capacity considers launching a national cryptocurrency, then we can say that added regulation appears to be a step in the right direction.

Who defines the regulations?

While each country has its own financial regulator that oversees banking and fin-tech sectors, the crypto sector has largely been the wild-wild west with little to no oversight. 

The US is one of the few countries that has taken steps to regulate this market but due to the complex nature of cryptocurrencies, it is difficult to put it under the governance of any single financial watchdog. At present, the SEC, CFTC and the IRS are all involved in regulating it. 

Meanwhile, in other countries, the question has been revolving around whether or not to outright ban cryptocurrencies. Even the UK does not have clearly defined Bitcoin taxes although the Financial Conduct Authority (FCA) has been reported to be stepping up to the task. 

Bitcoin will greatly benefit from a regulatory structure that clearly defines it at a national level. At present, there is no single source of truth when it comes to launching a crypto business. The same is true for investing in cryptocurrencies – you are largely at the mercy of your lawyers and CPAs.

regulatory sentiment

Crypto companies already know how to toe the line

No one should think that cryptocurrency is totally averse to regulations.

Cryptocurrency-related companies in the U.S and abroad have taken action to comply with rules governing other financial institutions. These include Anti-Money-Laundering (AML) and Know-Your-Customer (KYC) regulations. 

Adhering to these standards and processes does not affect Bitcoin’s core principles of decentralization. Additionally, it is these same checks that have allowed Bitcoin to expand its reach beyond the shady darknet and forums in which its life began.

How do cryptocurrency taxes impact the common man?

One of the biggest debates in the crypto community regarding regulations is the issue of tax.

Taxation has one fundamental objective: to help authorities raise the money needed to build and maintain a country’s infrastructure: hospitals, schools, roads etc. 

There is often an instinctively negative reaction to taxes of any kind.

A common misconception among many taxpayers is that tax regulation brings with it psychological torment, bureaucracy and big chunks of lost money they would rather keep.

This general feeling hits a fever pitch when new laws that raise tax rates come into effect.

However, there needs more information about the importance and overall benefits of the policy. These will help people understand the reason why taxing Bitcoins can be both necessary and positive.

Why bother paying taxes on cryptocurrencies?

Simply put, not paying your taxes is punishable by law. You must report all gains (and losses) from crypto trading to your tax agency.

This means you have to keep records of transactions that result in a taxable event such as when you trade, sell or trade Bitcoin for other cryptocurrencies.

As tax laws may differ from country to country it is best to look upon your local tax register to find out more about the taxes you’ll need to pay.

Furthermore, many tax agencies around the world have begun to focus on crypto traders. In 2019, a Swedish trader was penalized 300% of his actual profits for not properly filing his taxes. 

The US has also been active and at the moment, thousands of people are receiving notices concerning unpaid taxes on their bitcoin holdings. 

A similar matter is also brewing in the UK where the tax agency, HMRC, has begun requesting information from crypto exchanges about their UK-based users. The information received is likely to result in letters or penalties for traders that withheld taxes.

As a crypto holder, you should know that failure to pay Bitcoin taxes is engaging in tax fraud. Not paying your deeds could see you risk time in jail or heavy financial penalties.

Ignorance is never an acceptable excuse when it comes to matters of the law. So, claiming you ‘did not know’ is unlikely to hold up.

If you feel overwhelmed by the whole tax issue it is advisable to consult a crypto tax accountant who can help navigate you through the puddle.

The average citizen is the victim in most cases!

Technically taxation and similar regulatory tools should be of instrumental value. The authorities provide a positive environment for business competition and promote innovation. 

On paper, this is almost always the intention. Governments claim to be acting in a fair manner that will result in more benefits for everyone.

However, as it often happens in other sectors of the economy, the common person – or owners of small businesses – are the only ones that suffer and end up falling in the trap of even more regulations.

Let’s take a look at the US for example. As per the 1086 Internal Revenue Code, using crypto for payments or exchanging them for another currency is still a taxable event.

This can obviously have a negative influence on the average American. He may be interested in using digital currencies but is tired of high taxes. 

The good news is that it takes one regulation to change another, and a recent bill introduced in the U.S. House of Representatives could do just that.

There is a proposal called the Crypto Tax Amendment Bill, which seeks to change existing tax laws to exclude crypto-to-crypto trades from capital gains tax.

The bill seeks to categorize crypto-to-crypto trades (ex. Exchanging BTC for ETH), as “like-kind” exchanges. This like-kind exchange currently only applies to real estate and means that if you exchange your house for someone else’s then you don’t have to pay any tax on that.

Final thoughts

More tax laws are seeing their way into the crypto space. In December 2017, the U.S. Congress enacted the Tax Cuts and Jobs Act laws that introduced a raft of key changes.

These changes are already impacting personal income as tax rates for the average American citizen are steadily increasing.

Similarly, there have also been developments in the UK. This is one of the countries with quite clear tax rules around cryptocurrencies.

Here are some resources which contain more specific guidance around tax laws in different countries:

Bitcoin taxes need to be an important topic of conversation. We need to address the heavy tax burden that affects average citizens. We need to make sure that crypto doesn’t become just another avenue for exploiting hard-working people’s financial gains. 

With that said, having new stringent rules and regulations in place may mean that companies need to completely overhaul their existing structures. However, the upside is a well-regulated sector that will likely be more attractive to investors than a wildly unregulated one.

This is a guest post by Robin Singh, founder of Koinly – a cryptocurrency tax software that helps crypto investors generate capital gains reports.