Tax Natives crypto Archives

Taxation of cryptoassets and Web 3.0

13 March 2023 8:30 pm Leave a Comment

Taxation of cryptoassets and Web 3.0 – Introduction

Introduction

The Web 3.0 industry has been expanding in Japan in recent years.

However, uncertainty around the tax treatment of Web 3.0 transactions and cryptoassets in Japan have been problematic for the businesses in this nascent space.

What is Web 3.0?

Web 3.0 refers to the next generation of the World Wide Web, which is characterized by a more decentralized, interconnected, and user-centric internet.

It is also known as the decentralized web or the semantic web.

Unlike Web 2.0, which was mainly focused on user-generated content and social networking, Web 3.0 aims to create a more open and decentralized internet using blockchain technology and other distributed systems.

This would allow for more peer-to-peer transactions and communication, reducing the need for centralized intermediaries and creating more privacy and security for users.

Web 3.0 also seeks to provide a more intelligent and personalized web experience, by using artificial intelligence, machine learning, and other technologies to make sense of the vast amounts of data available online. This could lead to more intelligent search engines, personalized content recommendations, and more efficient data processing.

Overall, Web 3.0 represents a significant shift in how we use and interact with the internet, with a greater focus on user control, privacy, and decentralization, as well as more intelligent and personalized web experiences.

MTM Rules and tax uncertainty

One example of the difficulties is for those businesses who would like to issue tokens in Japan.

An illustration of this is that several blockchain companies have avoided issuing tokens in Japan, due to the tax burden derived from the application of the Year-End Mark to Market (MTM) Rules under the Corporation Tax Act (CTA) in Japan.

According to the Payment Services Act, corporations that hold cryptocurrencies that are traded in “active markets” must adhere to certain rules.

These rules require the corporations to update the acquisition price/booked price of their cryptocurrencies to reflect their current fair market values, a practice commonly referred to as “Mark to market (MTM).”

Additionally, any gains or losses resulting from these price updates must be realized at the end of each business year.

Further, there is also uncertainty more generally over the tax treatment of Web 3.0 related transactions.

The 2023 reforms

Starting in 2023, there will be some changes to the tax rules for cryptocurrencies. If a cryptocurrency has been issued but not yet distributed to third parties, it will not be subject to certain tax rules at the end of the year, as long as certain conditions are met. These conditions include technical restrictions on transfer or entrusting the cryptocurrencies to a trustee under specific conditions.

Additionally, if a corporation borrows cryptocurrencies from a third party and sells them but does not buy back the same amount by the end of the year, they will have to recognize any gains or losses as if they had bought back the same amount.

These tax reforms will apply to corporations whose business year starts on or after April 1st, 2023. The specific details of the requirements for the first condition mentioned above will be disclosed in April 2023 or later.

NTA guidelines re NFTs

General

In addition, the NTA (National Tax Agency) in Japan has released the first official guidelines on how NFTs (non-fungible tokens) are taxed.

Scope of guidelines

These guidelines cover:

individual income taxes,
corporate taxes,
Sales / consumption taxes,
inheritance/gift taxes, and
statutory reporting obligations.

The guidelines use examples of art NFTs, which are backed by copyrights for digital designs, that have been distributed.

Foreign business operator distributing in Japan

For a foreign business operator distributing NFTs in Japan, the tax treatment will vary depending on the legal characteristics of the NFTs. Therefore, it is recommended to consult with tax experts to determine the tax treatment for each NFT.

Income tax and corporate taxes

Regarding individual income taxes and corporate taxes, the NFT FAQs explain that an person who is UK resident for tax purposes who creates digital art and sells art NFTs related to such digital art through a marketplace in Japan is not subject to Japanese income or corporate taxation.

This is because a person who is not a tax resident in Japan and has no permanent establishment in Japan is generally not subject to Japanese taxation on the income derived from the issuance (first-sale) of NFTs, unless the NFTs are backed by real assets which trigger Japan-sourced income separately.

Sales / consumption taxes

With regard to consumption taxes (Japanese value added taxes), the NTA deems the issuance of art NFTs as “cross-border provisions of electronic services.”

Therefore, the consideration for the issuance of art NFTs is taxable if the buyer of the art NFTs is an individual located in Japan or a Japanese corporation. A foreign issuer of art NFTs would be subject to consumption taxes in Japan in respect of the primary sale of the issued art NFTs to Japanese purchasers.

For withholding obligations, payment of the consideration for the issuance of art NFTs would generally be subject to Japanese withholding tax levied on royalties.

However, withholding obligations would not be triggered if it is difficult for the purchaser of the art NFTs to distinguish the consideration for the grant of copyrights from the total amount of NFT sales.

Inheritance / gift taxes

Under Japanese tax laws, an individual recipient of assets located in Japan by way of an inheritance/gift from another individual would be subject to inheritance/gift taxes even if the recipient is located outside of Japan.

In the NFT FAQs, NFTs are included in the scope of taxable assets so long as they have an economic value.

Conclusion

Like most jurisdictions around the globe, relevant authorities have been playing catch up in ensuring regulation and tax rules are fit for purpose in the new world of Web 3.0.

If you have any queries about Taxation of cryptoassets and Web 3.0 in Japan or Japanese tax matters in general, then please do get in touch.

The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.

Germany cryptocurrency tax: clarification issued

31 May 2022 10:29 am Leave a Comment

Germany cryptocurrency tax: Introduction

In an eagerly anticipated announcement, the German Federal Ministry of Finance (BMF) has clarified its view on the taxation of cryptocurrencies.

In addition to the position on the buying and selling of crypto, the guidance also sets out the position on activities such as mining, staking, lending, and other transactions.

The nature of cryptocurrencies

The German tax man has determined that units of cryptocurrencies are economic goods. These ‘goods’ are attributable to the owner as the holder of the private key.

In cases where the wallet and private key is managed by a third party provider (such as Coinbase or Binance) then the asset is attributable to the beneficial owner of the cryptoassets.

Key issue: Private activity v commercial activity

Like many jurisdictions, the key issue for determining the tax position on any profits generated is whether the transactions take place through personal activity or in the conduct of a commercial activity.

In this regard, the BMF has confirmed that investors who hold their cryptocurrency as personal assets can sell them free of tax as long as they hold the assets for at least one year.

This is welcome as, in previous missives, the BMF had stated that the holding period was ten years for private investors.

This one-year period does not apply if the cryptocurrency is held as business assets.

Again, as per other jurisdctions, in many cases the distinction between commercial and private activity might be a blurred one and is an area ripe for dispute.

It should be noted that if cryptocurrencies are held by a domestic corporation such as a GmbH then the income is always considered to be commercial.

Mining and Forging activities

The authorities have also set out the position for other blockchain activities including:

Mining in a proof of work consensus mechanism; and
Forging in a proof of stake consensus mechanism

It seems to be the case that the German tax authorities will assume that such activity is commercial in nature.

The block creation leads to an acquisition (not to a production!) of the asset, which has to be recognized at the market price at the time of acquisition (profit-increasing). Only at the time of the realization of the proceeds from a future sale are any acquisition costs to be deducted from the profit.

Only the staking (without taking over the block creation), as well as, if applicable, the participation in mining and staking pools or a cloud mining service may again fall within the scope of private asset management. However, again, this depends on the individual case.

Airdrops

The authorities has also set out its view on the acquisition of cryptocurrencies received by private investors in the context of airdrops. Here, the receipt of the new tokens may be taxable where the recipient of the airdrop has dome something in return for the airdrop.

Perhaps surprisingly, the authority considers it sufficient for this purpose that the recipient is required to provide contact details on an online form.

Where nothing is done in return for the airdrop then there are no tax consequences (although German gift taxes might be in point on the receipt).

Conclusion – Germany Cryptocurrency tax

Of course, this additional clarity is helpful. Of course, the fact that an private investor can dispose of assets free of tax after 12 months is very welcome for relevant investors.

It remains to be seen whether there will be further missives from the German tax authorities that include their position regarding Non‑Fungible Tokens (NFTs) and other types of assets and activities.

If you have any queries about this article, German cryptocurrency tax, or the matters discussed more generally, then please do not hesitate to get in touch.

Spain: Non-Fungible Tokens (“NFTS”) and VAT

27 May 2022 6:36 pm Leave a Comment

Introduction – Spain NFT VAT

Spain has issued its first ruling in respect of VAT in relation to the sale of NFTS. Specifically, where the NFT involves the right to use an underlying digital artwork.

Here, the Spanish Tax Agency determined that the sale of NFTs is a supply of “electronically supplied services”. As such, if the place of supply is determined to be in Spain, then the sale will be subject to Spanish VAT. The prevailing rate is 21%.

However, there is an issue here in that a purchaser of an NFT is likely to be unknown due to the pseudonymous nature of the blockchain. As such, a seller of an NFT might encounter real difficulties in determining the location of the purchaser and, ultimately, whether or not they should charge Spanish VAT on the sale.

The nature of NFTs for VAT purposes

The Spanish Tax Agency now dictates that the sale of an NFT is not a supply of goods. This is on the basis that the underlying asset is digital in nature. As such, the analysis is that the NFT gives ownership rights over a digital asset rather than over a physical good.

The Spanish Tax Authority concludes that the sale of NFTs is therefore an “electronically supplied service” for VAT purposes. This definition can be found in Article 7(1) of Council Implementing Regulation (EU) No 282/2011.

VAT implications

As an “electronically supplied service” the applicable rate of VAT is 21% as opposed to the reduced rate (10%) that usually applies to art works.

In determining whether the seller must charge VAT at the general VAT rate of 21%, the place of supply rules are in point. These are based on the condition (business or consumer) and location of the purchaser.

If NFTs are sold to a company or to an individual acting in a business capacity, then the place of supply will generally be where the buyer has established its business. An exception might be where the business is located outside the EU.

Where the buyer is an individual not acting in a business capacity and the seller is established in Spain, then the place of supply will generally be where the buyer has his or her permanent home (or usually resides).

In summary

The position might be summarised as follows:

The buyer resides in Spain: the sale would be subject to Spanish VAT:
The buyer resides in another EU Member Sate: the sale is subject to VAT in the EU Member State of consumption, unless below the €10k threshold in the year: and
The buyer resides outside the EU: he sale would fall out of the scope of Spanish VAT (unless the use and enjoyment rules are applicable)

Of course, there is a fundamental issue in identifying the person acquiring the NFT and, therefore, their location. It is worth noting that EU Regulation No 282/2011 provides some guidance here and provides for a presumption that a customer in a ‘virtual transaction’ is based where their IP address, or any method of geolocation, is located. However, even this has its limitations.

If you have any queries about this article, Spanish tax, or the matters discussed more generally, then please do not hesitate to get in touch.

Portugal crypto tax: Buying and selling crypto assets in Portugal

18 May 2022 8:32 am Leave a Comment

Introduction – Portugal crypto tax

Portugal is often held up as an attractive place for crypto investors. More generally, it has an attractive regime for migrants moving to Portugal, who might be able to avail themselves of its Non-Habitual Residence (“NHR”) regime.

However, where the NHR regime is clear, the tax law around crypto-assets is more as a result of what the law does NOT say.

Portugal as a growing hub for crypto

As stated above, Portugal has become a popular destination for those seeking a safe harbour for crypto gains.

It is estimated that between March and May 2020, the purchase and sale of cryptocurrencies in Portugal increased by 60% year on year. However, up until now, the Government has not acted to clarify or expand its legislation to cater for this relatively new asset.

Current position

In Portugal, there are three potential categories under which gains on the buying and selling of cryptocurrencies could be caught. These are as follows:

Capital Gains (Category G) – such as sale of an apartment or shares
Capital Yields (Category E) – such as property rental or dividends
Professional Income (Category B) – Consultancy fees etc

In respect of the first of these, the tax code specifies which cases will be subject to tax a as a capital gain. However, the class of items is an exhaustive list. In other words, the law only applies to something which is on the list. As crypto assets are not on the list they are not taxable.

In respect of Category E, this does not apply as the buying and selling of cryto-assets is not a yield on capital.

Category B is the one where we might fall into the tax trap. However, it is only likely to apply to certain cases. This category will apply where any crypto profits are as a resuly of a regular professional activity. Of course, this might be relatively easy to determine in extreme cases, but the lack of certainty for those in more marginal cases is a concern.

A change in the winds?

The current position means that Portugal is on a list of countries that still do not tax profits from this type of asset. Hence, why Portugal has become an attractive destination for crypto investors.

However, nothing lasts forever.

Indeed, on 13 May 2022, finance minister Fernando Medina confirmed that the Government is contemplating how it might tax crypto gains in the future. He did say there were no firm proposals to introduce any such legislation.

If profits from the buying and selling of crypto assets was brought into the tax net in Portugal, then it would seem likely they would be subject to tax at 28%.

However, Mr Medina did acknowledge that an imposition of high levels of tax might “bring revenue down to zero” so he is at least aware of the tight rope his Government might be treading.

If you have any queries about this article, Portugal crypto tax, or the matters discussed more generally, then please do not hesitate to get in touch.

Crypto tax Ireland – Buying and selling crypto

17 May 2022 7:18 pm Leave a Comment

Introduction – crypto tax Ireland

Like most jurisdictions around the world, there are no specific tax rules that apply to the buying and selling crypto assets in Ireland.

Therefore, like those other jurisdictions, the tax position on the sale of crypto assets will be subject to general Irish tax law principles.

In addition, the Irish Revenue has also issued guidance in some particular areas.

This article will mainly discuss cryptocurrencies – such as bitcoin, Ethereum and Dogecoin. The position for non-fungible tokens (“NFTS”) and other digital assets might differ.

Buying cryptocurrency

As one might surmise, the purchase of cryptocurrency is unlikely to give rise to any direct tax implications. For instance, there is no stamp duty on crypto assets (as there might be on the purchase of shares, for instance). Further, it is unlikely there will be any VAT implications where we are looking at an investor or trader buying and selling crypto-assets.

However, the purchase of the cryptocurrency will be relevant for determining the base cost of the crypto when the investor decides to sell the assets.

Sale of crypto-assets by individuals

General

The Irish tax position will depend on the Irish residence position of our crypto-investor. Specifically, whether they are:

Resident for tax purposes in Ireland; or
They are not resident for tax purposes in Ireland

Irish resident individuals selling cryptocurrency

If an Irish resident individual sells such an asset at a gain then it will usually be subject to capital gains tax. This is currently 33%.

Where the disposal results in a loss, then this capital loss can generally be:

Used in the current year against other gains; or
Carried forward to future years

The position is slightly different if the person is carrying on a ‘trade’ of dealing in crypto. Here, any profit on the sale of crypto would be subject to income tax. Marginal income tax rates of up to 55% – where one includes social charges – might therefore be payable.

It is worth noting that a trading classification is only likely in exceptional cases with the trading needing to be carried out in a deliberate and commercial fashion.

Non-resident individual

A non-Irish resident individual (who is also non-ordinarily resident) is liable to Irish CGT on gains arising in Ireland from the disposal of Irish ‘specified’ assets only (e.g. land and buildings in Ireland). As such, crypto gains should not be taxable.

Sale of crypto-assets by Companies

An Irish resident company that disposes of crypto at a gain will be subject to capital gains tax at 33%. Similarly, losses will also be treated in the same way as set out above for individuals.

Where such a company conducts a ‘trade’ of dealing in crypto, then it’s profits will generally be subject to corporation tax at 12.5%.

Again, the threshold at which activities might be considered a trade is a high one. However, it is generally thought that a company might satisfy this more easily than an individual.

Mining cryptocurrencies

General

The Irish Revenue has not provided any guidance on the position when it comes to the mining of cryptocurrencies.

If they follow the UK tax authorities position on the same activity, then the treatment will depend on whether:

The person is conducting a trade of mining crypto; or
The person’s activities fall short of a trade

Trade

Here, the person will be taxable on the trading profits generated from the mining activities.

A company will pay tax at 12.5% but an individual will be subject to tax at their marginal rates.

No trade

Where the activities fall short of a trade, then the income received by the person will be treated as ‘miscellaneous’ income.

Miscellaneous income tends to qualify for fewer reliefs than trading income.