There is so much cryptocurrency news to talk about these days that it is hard to know where to begin. Some of it is good for crypto users, other news is not so good. All of it is worth paying attention to. Two cases in point are stories that recently emerged from the West. One is out of Britain and the other from the U.S.
Both stories highlight the central point that governments are coming to terms with the fact that they have to accept cryptocurrency as a real and viable monetary system. It's no longer possible to hide one's head in the sand and think Bitcoin, Ethereum, and all the rest are simply fads destined to fade away. They are not and they will not. So now regulators and central banks have to start taking a position one way or another.
In Britain, Her Majesty's Revenue and Customs (HMRC) has made the decision to update its official guidance on cryptocurrency taxation. The new guidance is not completely unexpected, nor does it contain anything that actually changes the government's position. It merely clarifies some key points that were previously ambiguous.
Across the Pond, a key official in the Trump administration has made clear his belief that the U.S. needs to get out in front of any possible Libra launch by having an alternative payment system in place. FTC Commissioner Rohit Chopra was sounding a little bit like a Chinese regulator when he made his comments in a November 7 (2019) letter sent to the U.S. Federal Reserve Board of Governors.
Crypto and taxes in Britain
Britain is largely seen as one of the friendliest environments for cryptocurrency. Government regulators have left institutional and retail crypto users alone for the most part. However, there have long been some nagging questions about taxation. HMRC hopes to have cleared up most of them with its updated guidance. The updated guidance touches on tax issues affecting both large-scale traders and individual users alike.
What stands out right away is that the document does not refer to 'cryptocurrency' per se. Rather, it refers to 'crypto assets' instead. Why? HMRC explicitly states in the guidance that it does not consider digital tokens like BTC to be currency. As such, they do not want to create any confusion with their terminology. In their minds, all crypto assets are just that: assets.
This may not seem like a big deal to the casual Bitcoin user. And perhaps it isn't. But purely from the standpoint of crypto competing with fiat, a government entity refusing to acknowledge BTC and other cryptos as currency draws a clear line in the sand. They intend to treat Bitcoin and its competitors as competing assets and/or payment systems.
Capital gains taxes
The clarification of crypto as an asset does have one added benefit in that it clarifies the tax positions of most users. In almost all cases, the gains realized from using crypto are treated just like gains from other investments. That means they are taxed as capital gains. The guidance applies the standard for both commercial enterprises and individuals.
Let us say you are a casual BTC user who prefers digital payments to play online casinos. Let's also say you purchase £5,000 in BTC to cover several months of online gambling. Any gains you make on that purchase due to a higher BTC price is counted as capital gains for tax purposes. Even if you lose big in the online casino, you still have to report your crypto gains for taxes.
Note that you are not reporting and paying taxes on profits from month-to-month. It is an annual thing. But at the end of each tax year, any gains you make by purchasing BTC are taxable as capital gains. The other side of that coin are your losses. If you lose over the course of the tax year, said losses can offset gains elsewhere. They will effectively reduce your tax liabilities.
Also note that HMRC offers a caveat to the individual crypto users: capital gains only have to be reported when crypto is converted to fiat. That is because crypto is a personal investment to individual users. Fortunately, even large-scale trading is still classified by the guidance as 'personal activity' unless special circumstances clearly dictate a level of sophistication that otherwise suggests professional trading.
Taxes on businesses
HMRC's new guidance also addresses crypto taxes on businesses. To begin with, merchants willing to accept Bitcoin and other cryptocurrency payments are accepting payments that can be taxed as income. Note that businesses do not have to convert their crypto payments to fiat in order to be taxed. As the government sees it, income is income.
Cryptocurrency mining is addressed in the guidance as well. Any gains miners make as a result of rising prices are taxed as capital gains. Any gains or profits realized from activities other than trading or direct mining are taxed as income. Finally, all other gains are subject to corporate tax as they are considered profits from business activity.
Have you received cryptocurrency through an airdrop? It is taxable as well. HMRC says that airdrops can be taxed either as income or capital gains, depending on circumstances. Any crypto assets received through an airdrop that is not considered payment for goods or services are taxed as capital gains. All other airdrop gains are taxed as income.
There is a lot about the guidance to absorb. Now that it is on the table, crypto traders and day-to-day users in Britain are obligated to know what it says so that they can pay their taxes. Note that this post does not constitute legal or tax advice. We are just reporting the news. If you have any questions about your own taxes, talk to a professional.
Heading off Libra in the U.S.
While HMRC has been trying to answer complicated tax questions, the U.S. government has apparently been working on a project that could make Libra moot in that country. A payment platform known as 'FedNow Service' has apparently been in development since 2018. That would explain why U.S. regulators have seemed so openly hostile to Libra from the outset.
The FedNow Service is allegedly a real-time payment and settlement service that will be made available to both consumers and commercial enterprises when it is finally ready to go. The platform will allow for around-the-clock payments and settlements outside of traditional banking hours.
Though there is nothing unusual about the FedNow Service from a technology standpoint, the platform is important in the sense that it would accomplish the same thing Libra is supposed to accomplish but without introducing an entirely new stablecoin-based monetary system.
Getting out ahead Libra
Knowledge of the FedNow Service platform is pretty widespread within U.S. government circles. So why is it newsworthy now? Because FTC Commissioner Chopra recently made some pretty bold statements regarding its purpose. In the previously mentioned letter, he made clear his belief that the Fed needs to take seriously the threat of any "private mega-bank monopoly" taking over the electronic payment systems in the U.S.
Chopra even went as far as to call out Libra, writing that the project "underscores the appetite for real-time payments and the urgency of intervention by the Federal Reserve." It is clear that Chopra buys into some of the same fears his colleagues are concerned about, fears that Libra or some other private system will undermine government control of electronic payments.
Such views are certainly not in the minority anymore - if they ever were. In China, officials with the People's Bank of China have made it clear that they intend to launch a cryptocurrency at some point in the not so distant future. They are racing to get their platform up and running before Libra. They also hope their digital currency will be strong enough to persuade the world to dump the U.S. dollar as the preferred reserve currency.
Regulators in Germany and France have also made it clear that they do not have fond feelings for either Facebook or Libra. Germany has gone as far as to say they will do everything they can to prevent Libra from ever launching in Germany. Lawmakers are encouraging their EU counterparts to take the same stand.
So, what can be learned from these two stories? First off is the reality of cryptocurrency itself. Both stories demonstrate the need for government officials to stand up and recognize cryptocurrency as a force to be reckoned with. They want to be able to control it, which they will ultimately do through taxation and regulation.
The stories also demonstrate a growing reluctance among regulators to treat cryptocurrencies as anything equal to fiat. They are content to acknowledge crypto assets as assets because doing so also allows government taxation. But they are not willing to accept them as payment systems that could eventually undermine the system as we now know it.
The good news in all of this is a growing consensus that cryptocurrency is real and legitimate. For all those critics who claim it is not real, one need only look at government reaction. HMRC would not be moving to tax something that is not real. The U.S. Federal Reserve would not be attempting to launch its own alternative to a fictional payment system.