The tax treatment of cryptocurrencies is a rapidly evolving debate with various countries, such as Spain, Portugal, India, and many others, adopting tax rules in succession. For tax practitioners, the main challenge is to deal with capital gains, while for tax administrations it is to regulate such a dynamic ecosystem.
The truth is that there is not a fixed definition of cryptos or of the nature of transactions involving cryptos. This is an environment of continuous change. For this reason, beyond taxation this article briefly addresses what cryptocurrencies represent from a financial and regulatory perspective and what are the trends in the crypto market.
The financial definition of cryptos depends on the regulations adopted by governments and international organizations. Having this into account, it is possible to classify such regulations in four labels:
(i) where there is no regulation on the subject or very weak regulation. Some governments act with caution since it is very difficult to regulate something that is continuously changing.
(ii) where there is an intention to attract exchanges and investments in cryptos in general, the regulation is broad and presents gaps, so that it is possible to adopt more interpretations on the nature of the crypto transactions.
(iii) it tends to be more careful in order to avoid fraud. OECD is the best example in terms of Soft Law. The organization has issued a public consultation document1 focusing on international tax transparency initiatives and seeking more formalization and disclosure in the crypto market.
(iv) as the name suggests, this is the most radical approach, which is barring the existence of crypto exchanges in the country or even prohibiting residents to buy or sell cryptocurrencies in foreign markets and exchanges.
The idea of transparency in the crypto market is pursued by governments due to the perceived idea that cryptos are conducive to fraud. It is difficult for Central Banks to control the flow of transactions involving cryptos and disclosure seems to be, if not the key, the first step to achieve relatively greater transparency.
Coming back to the financial nature of cryptos, despite the existence of other approaches, the definition of a crypto as an asset has been the most accepted among regulators. This is the reason why tax debates orbit around the question of how to assess the capital gains, especially in situations involving swaps of cryptos and currently the use of cryptos to buy NFTs (is there a capital gain in this case?).
Marketwise, the cryptos have been used more than never, even though the market has faced some bad weather lately due to external circumstances, what somewhat shows the weaknesses of such assets.
Either way, cryptos now are used for investment, consumption, leisure, buying NFTs, gaming, money transfers, promoting donations and charity, and generally to do many usual things that only “traditional” money could do in the past, such as paying for a hotel among other things and activities.
The conclusion is that this is a non-exit reality. Governments, organizations, and regulators must adapt themselves, as well as other fields, such as marketing and entrainment fields. Tax administrations, of course, cannot place themselves behind the new trends and evolutions, but should not act to prevent the use of cryptos, not only because that would be an impossible task but also because it is somehow a fundraising opportunity.