In the ever-evolving landscape of finance, cryptocurrency has emerged as a groundbreaking innovation, offering decentralised and borderless transactions.
However, as crypto has become increasingly integrated into mainstream financial systems, a new challenge has arisen for its owners – the murky waters of tax computation and reporting.
Some crypto enthusiasts may not be strangers to the complexities of taxation, while others may never have given it a thought.
As governments around the world strive to keep pace with the rapid growth of the digital asset market, crypto asset owners find themselves grappling with myriad challenges.
Global frameworks
One of the primary issues plaguing crypto tax reporting is the absence of a universally accepted regulatory framework.
Governments worldwide are slow to track the technological advancements, leading to a fragmented and often confusing landscape of crypto tax regulations.
Some jurisdictions have banned crypto assets and currencies, where others, such as the UK, have not yet fully implemented any financial regulatory framework but have a tax system that has adapted existing rules to classify coins, non-fungible tokens, airdrops, stakes, mining transactions either as income or capital or even both in part.
As a result, individuals holding crypto assets may find themselves in a legal grey area, unsure of how to accurately report their holdings and transactions.
The general supposition is that crypto asset are subject to capital gains tax in the hands of individuals, but may be subject to income tax if a high threshold is breached, but the position is nonetheless vague and open to a number of factors based on old arguments around whether an activity is trading or investment in nature.
Some crypto owners are unaware that moving tokens from bitcoin to etherium, for example, (coin to coin) even if not converted to fiat during or after the chain of transactions, has tax implications; or that the return they receive from staking may well be and most like is treated as taxable income.
Determining the tax implications of receiving free tokens through airdrops or navigating the tax consequences of a blockchain fork is not straightforward, if ever identified in amongst hundreds and maybe even thousands of lines of digitally coded blockchain transactions.
Volatility and tax crystallisation
The volatile nature of cryptocurrencies introduces another layer of complexity when it comes to tax calculations.
Unlike traditional assets with stable values, crypto prices can experience significant fluctuations within noticeably short periods. This can result in often seemingly unfair results. For example, there were gains in the early years, but in later tax years there are losses.
For most taxpayers, not all, the transactions are subject to capital gains tax, and intuitively one might expect that over a period if one has not reaped an actual reward by cashing in their chips, they would not have a tax bill.
