The high-profile Panama Papers brought global and systematic tax evasion into the public spotlight. While it might be argued the use of off-shore tax havens is simply a way to safeguard assets, the revelations prompted many authorities to look closely at the entire issue and how they apply due diligence.
The numbers spoke for themselves: 145 governments worldwide were estimated to be losing around 5% of their global GDP annually. Some countries fared better than others depending on the relative diligence of local tax offices. But based on 2016 Global GDP analysis – reported to be $75.4 trillion – worldwide tax evasion was subsequently estimated to be $3.85 trillion for that year alone.
Fast forward two years and global firms constantly face a global tax headache as every commercial jurisdiction steps up their efforts to stem potential revenue losses.
But the knock-on impact has seen virtual cryptocurrencies and the related blockchain online payment systems jump in popularity, because, despite functioning in the same way as real
currencies, they’re not issued or backed by central governments. Transactions are not subject to taxation and account holders are largely anonymous.
Increased globalisation, combined with real-time information sharing between nations, is putting multi-national business under close scrutiny, as governments everywhere aggressively analyse individual company tax audits and assessments. As a result, the added value of cryptocurrencies has been noted, thanks to them not being dependent on financial institutions.
Crypto could potentially undermine governments’ recent successes in tackling offshore tax evasion. Tax-evaders, who traditionally used offshore bank accounts in tax-havens, now opt for cryptocurrencies.
It’s a point not lost on major governments – in the US, legislators have taken particular interest in cryptocurrencies, singling out Bitcoin. The US Senate Committee on Homeland Security has announced plans for an inquiry which it was hoped would create some kind of regulatory framework for Bitcoin. A federal judge went on to rule that for purposes of US securities regulation, Bitcoin was indeed “money”.
But five years on and cryptocurrencies are still shunned by many banks – both onshore and offshore – because established banking operations are reluctant to deal with fund transfers between crypto exchanges.
Most banks simply don’t want to deal with the costs of scrutiny that comes from handling transactions involving cryptocurrency transactions. Today the real challenge for tax authorities is to either develop enforcement mechanisms that allow them to uncover funds hidden in cryptocurrency accounts, or accept and embrace them as a genuine form of commerce.
To help legitimise cryptocurrencies, tax breaks are now being offered with progressive thinking by some states, with differing incentives, outlined below. The most progressive country when it comes to cryptocurrency taxation is Belarus, which has so far deemed Bitcoin and other cryptocurrencies completely tax-free – for the next five years at least.
The land-locked Eastern European nation also allows blockchain-related businesses to operate freely and pay no taxes until at least 2023. It’s a deliberate and integral strategy to develop a special economic zone to attract fledgling blockchain start-ups, or any business built on blockchain platforms.
France recently opted to re-classify cryptocurrencies as ‘movable property’, bringing down the capital gains taxation rate from as high as 41% to a flat 19%.
Portugal says it won’t tax any profits from cryptocurrency trading or investment, but only for individuals. Businesses still get taxed on profits generated from their blockchain-related business operations.
Denmark says it won’t tax any cryptocurrency traders and those who take yearly profits using Bitcoin won’t have to pay any capital gains tax at all, but it’s a stance which may change in due course. The Netherlands is broadly favourable thanks to its very straightforward tax system. At the start of each year, profits on cryptocurrencies must be declared, but tax is unlikely to amount to more than around 5% on any profits due to very low capital gains tax rates.
Unsurprisingly, Slovenia is favourable towards individual investors, with capital gains from bitcoin and other cryptocurrency profits related to trading and speculation not yet added on to respective yearly incomes. But being paid in cryptocurrencies does attract standard taxation rates.
Germany staked its claim as one of the world’s most progressive countries when it announced it won’t be taxing cryptocurrency transactions at all. Purchases using cryptocurrencies in Germany are currently not subject to tax either.
Other countries where there is presently no capital gains tax include United Arab Emirates, Qatar, Saudi Arabia, Bermuda, Cayman Islands, The Bahamas, Brunei, Kuwait Oman and Bahrain and even New Zealand, Hong Kong and Singapore.
Switzerland is also a haven for blockchain developers, given cryptocurrencies are not regarded as a currency, a property, or a service, or classified and hence not taxed.
It’s fair to say the rest of world is still behind the curve when it comes legitimising and leveraging the true value of cryptocurrencies, but we’ll bring news of each nation’s regulatory changes as they come to grips with crypto.