The OECD released a report titled Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues on October 12. The report, which was prepared and endorsed by the 137 members of the OECD’s Inclusive Framework on Base Erosion and Profits Shifting, provides a comprehensive analysis of the approaches and policy gaps across the main types of taxes (i.e., income, consumption, and property taxes).
The report addresses the following areas, across more than 50 jurisdictions (based on responses to questionnaires supplemented with publicly available materials):
- The characterization and legality of virtual currencies;
- The income tax consequences across the different stages of a virtual currency’s lifecycle, from creation to disposal;
- The consumption and property tax treatment of virtual currencies;
- Common tax policy challenges and emerging issues; and
- Considerations for policymakers.
Characterization and Legality
The report notes that there is no internationally agreed standard definition or taxonomy of crypto-assets, but regulators and researchers have broadly classified crypto-assets into three main categories based on their economic function: payment tokens (or virtual currencies); utility tokens; or security tokens. The rest of the report then focuses on the treatment of virtual currencies.
The report reflects the wide range of approaches that different jurisdictions have taken to the income taxation of virtual currencies. For example, some jurisdictions have imposed full or partial bans on virtual currencies, ranging from outright bans on the use of virtual currencies to bans on certain activities relating to virtual currencies (such as commercial trading platforms or ICOs) to restrictions on certain sectors (such as financial institutions). However, virtual currencies are legal in the vast majority of jurisdictions. Although most of these jurisdictions have characterized virtual currencies as property rather than currency (Italy and Poland being notable exceptions), jurisdictions have variously classified virtual currencies as: (i) intangible assets other than goodwill; (ii) financial assets; (iii) commodities; (iv) legal payment methods; and (v) unspecified property.
Income Tax Treatment
The report describes several different approaches that have been taken in determining when the first taxable event occurs for income tax purposes for mined cryptocurrencies, and in determining which kinds of exchanges of virtual currencies (e.g., crypto-to-fiat, crypto-to-crypto, crypto-to-goods-and-services) generate a taxable event. Some jurisdictions, such as Australia, Canada, the Netherlands, Switzerland, and the United Kingdom (UK), adopt different approaches for businesses/regular traders and individuals/investors.
Consumption and Property Tax Treatment
More uniformity exists in the context of value added taxes (VAT). According to the report, the VAT treatment of exchanges in virtual currencies is relatively consistent across European Union (EU) member states, although some differences remain in the treatment of mining income, related services, and other crypto-assets. Many other jurisdictions have adopted the EU approach, with the report identifying New Zealand as a notable outlier.
Because virtual currencies are treated as property in most jurisdictions, they are likely to be subject to gift, inheritance, or wealth taxes imposed in those jurisdictions. However, transfer taxes typically do not apply to virtual currencies because they typically do not fall within the scope of such taxes (e.g., because those taxes only apply to real estate or securities).
Common Challenges and Emerging Issues
The report identifies practical challenges to determining the value and cost basis of virtual currencies. Guidance on valuation generally has been limited and where such guidance does exist, it acknowledges the difficulties in assessing the value of virtual currencies. Jurisdictions have adopted different approaches to determining basis, including specific identification of units (e.g., US), deemed chronological order (such as first-in, first-out, or FIFO) (e.g., Finland), or basis pooling (e.g., UK).
Although only a handful of jurisdictions have provided guidance on the income tax treatment of hard forks, different approaches have been taken in this area as well. The US is an outlier here, as the only jurisdiction covered by the report that has determined that a taxable event occurs when virtual currency held for investment experiences a hard fork. Please click here for our previous coverage on hard forks. According to the report, the most common approach—adopted by Austria, Finland, and the UK—provides for taxation only upon disposition of a forked currency. The report also describes Australia as adopting a hybrid approach, where tax treatment depends on whether the virtual currency is held for investment or in the course of a business.
The report focused on several emerging issues in the virtual currency area, including:
- Whether stablecoins should be taxed like other virtual currencies or more like securities or foreign currency;
- Whether central bank digital currencies (CBDCs) should be taxed like stablecoins or fiat currency;
- Whether loans of virtual currency (so-called decentralized finance, or DeFi) give rise to a taxable exchange and interest income/expense; and
- Whether staking rewards should be taxed like mining rewards or investment income and whether tax laws should account for dilution of value.
Considerations for Policymakers
The report concludes by providing considerations for policymakers that wish to strengthen their legal and regulatory frameworks for taxing virtual currencies and improve certainty for tax administrators and taxpayers, including:
- Providing clear, regularly updated guidance and legislative frameworks for the tax treatment of crypto-assets and virtual currencies, which considers consistency with the treatment of other assets and remains abreast of emerging areas;
- Supporting improved compliance, including through the consideration of simplified rules on valuation and on exemption thresholds for small and occasional trades;
- Aligning the tax treatment of virtual currencies with other policy objectives, including regarding the use of cash and environmental considerations; and
- Developing appropriate tax guidance in response to emerging technological developments, including stablecoins, CBDCs, proof-of-stake, and DeFi, for which existing frameworks may not be appropriate.