Rehashed – #3 Taxing Times: IRD releases Cryptocurrency Tax Guidance

There are Two Certainties in Life: Death and…

Taxes? The IRD has recently released guidance regarding taxation of cryptocurrencies. TLDR: Cryptocurrencies should be treated like property for tax purposes, including crypto-crypto trades and payments for goods and services. Below are resources which may be useful. Please don’t take this as tax advice and if you are confused, seek a professional opinion.

The Tax Saga continues in the Global Markets

As the early January bull market has soured into a bear trend through the first quarter of 2018, many have wondered where to place blame for the quick turn in fortunes. Some commentators have pointed the finger at the 17th of April, tax day in the U.S.

2017 saw unprecedented mainstream adoption and with it, an unprecedented magnitude of wealth creation, almost USD $600 billion dollars worth. So how does the Tax Man come into this? Let me scribble down a quick back of the napkin calculation.

Cryptocurrency entered 2017 with a total market capitalization of USD $18B. By years end, the space had reached USD $610B in total value. That’s a 34x, or 3400%, increase for those keeping track at home.

Cryptocurrency Market Cap 2017
Cryptocurrency Market Cap in 2017, data from coinmarketcap.com

Now, here’s where the numbers get murky. If we assume that 50% of that growth was accumulated from U.S. investors (a conservative assumption given USD exchange volume). that would lead us to believe that there was roughly USD $295.5B of wealth created in the U.S. in 2017.

Let’s bring this maths exercise to a close. Assuming 10% of the wealth created in the U.S. was realized as financial gain (and using an average tax rate of 33%), the IRS may be entitled to around USD $10 billion of U.S. investor money.

Given how easily the cryptocurrency market appreciated with increased demand, it’s not unrealistic that tax selling (perhaps nearly USD $10B worth!) could apply substantial selling pressure to push the market further south. However, the jury is still out on whether prices will react positively after the Tax Man collects his dues on the 17th of April. Whatever the case, it will certainly be an interesting one to watch. (Note: Chris Burniske just posted an extensive and compelling analysis regarding market sell-off to meet tax obligations).

Regulatory Cloud clears across the Tasman

Across the ditch, Australia has introduced new regulations for cryptocurrency providers. At a high level, the policy is a positive move which gives regulatory clarity to exchanges and helps protect investors.

Some highlights of the legislature: cryptocurrency providers must have satisfactory AML, CTF, and KYC programs in place, customer records should be kept for seven years and authorities should be notified of transactions surpassing $10,000 AUD.  Businesses have a six-month grace period to get up to speed with the regulations.

Rafael Delfin, the Head of Research at Brave New Coin gave the regulations his nod of approval:

“Australia’s policy developments should be welcomed by the general public as a step toward dissuading any potential illegal use of cryptographic assets without hindering further innovation and adoption of these assets.”

His sentiment here is spot on. This policy takes a step towards giving institutions and consumers confidence to own and use cryptocurrency as they would any other asset. Likewise, it does not dissuade innovators from developing blockchain enterprises. We should hope to see similar clarity on this side of the Tasman soon…

In the News

IRD customer segment leader Tony Morris outlines how the agency is working to ensure tax obligations are met by cryptocurrency investors

Chris Burniske highlights why we may look back on the last few months as the “Crypto Tax Crisis of 2018

Next month will mark the landmark implementation of the EU’s General Data Protection Regulation. Coin Center ran a good piece on what this means for open blockchain networks

Ripple, the financial technology company behind the digital asset XRP, was pulled over hot coals in the press when it was revealed that they have been trying to pay major US exchanges to list XRP

Ethereum co-founder Vitalik Buterin has proposed a supply cap on Ethereum. If the proposal is accepted the total supply would be capped at 120 million ether, or roughly double the amount of ether sold in the pre-sale in 2014

Coinbase, the largest cryptocurrency exchange in North America, has announced a venture fund to help develop an ‘open financial system for the world.’ This is part of a larger trend of emerging “ecosystem funds” we have recently been seeing

The former CEO of Mt Gox stands to receive up to $1 billion from its bankruptcy. What’s even more newsworthy, is that he doesn’t want the money

Chainalysis, a New York-based firm which helps law enforcement and financial firms keep tabs on who is using digital currencies, has raised $16 million from Benchmark Capital

Upcoming Dates

April 9 – Internet of Things Mini-conference, Auckland

April 11 – European Blockchain Summit, Slovenia

April 17 – U.S. Tax Day

Thanks for your company, stay tuned for next week’s edition of Rehashed.

Freddie Archibald

 

View previous issue: Rehashed – #2 History Repeats (Even in Cryptocurrency)

View next issue: Rehashed – #4 Aotearoa: Land of Flying Taxis and Blockchain


About the author:

Capital markets to crypto convert. From Christchurch →  Boston → New York, Freddie became infatuated with the potential of the digital asset economy after randomly plucking a book on bitcoin off a New York library bookshelf in 2016. Her parents are thrilled that she is chasing magic money on the internet.

Disclaimer:  The above references an opinion and is for informational purposes only. The opinions expressed by the author do not represent the opinion of BitPrime.

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