Global Cryptocurrency Turnover Tax Overview

Cryptocurrency trading may involve not only income taxes but also turnover taxes. This article will analyze the current and future taxation of cryptocurrencies from the perspective of turnover taxes, aiming to provide relevant information for cryptocurrency investors. This article suggests that compared to turnover taxes, more countries are likely to continue using income taxes or other forms of taxation for cryptocurrencies.

1. Turnover Taxes and Its Main Taxes

1.1 Overview of Turnover Taxes

A turnover tax or circulation tax is a type of tax that is levied based on the turnover amount or quantity of goods or services. It falls under indirect taxes and is collected during the process of goods circulation.

Based on the method of collection, turnover taxes can be classified into ad valorem taxes and specific taxes. Ad valorem taxes are levied based on the value or price of goods or services, such as value-added tax (VAT) and excise tax. Specific taxes are levied based on the quantity or weight of goods or services, such as customs duties and natural resource taxation.

1.2 Main Types of Turnover Taxes

The main types of turnover taxes include the following five categories: value-added tax (VAT), sale tax, consumption tax, business tax, and tariff.

• Value-Added Tax (VAT) is a type of turnover tax that is levied on the value added to goods or services at various stages of production, circulation, and consumption. It reflects the actual value added to goods or services.
• Sales Tax is a turnover tax levied on the sales amount or price of goods or services. It is collected at the final sales stage and only involves the end consumer. The United States is a typical representative country that imposes sales tax, and whether to levy sales tax, as well as how the tax base and rate are set, is determined by individual states and local governments.
• Consumption Tax is a turnover tax levied on specific goods or services at the stages of production, import, or sale. Unlike VAT, consumption tax usually targets specific goods such as cigarettes and luxury items, with the aim of adjusting consumption patterns and promoting environmental conservation.
• Business Tax is a turnover tax levied on the turnover obtained from providing services, transferring intangible assets, or selling real estate. Business tax was an old turnover tax in China that was replaced by VAT in 2015.
• Tariff imposed on goods and items entering or leaving a country, collected only at points of entry or exit.

It's worth noting that capital gains tax is not considered a turnover tax because it is not collected at various stages of goods or services production, circulation, and consumption. Instead, it is levied when assets are transferred or traded.

2 Cryptocurrency Turnover Taxes

2.1 Potential Taxation in Cryptocurrency Circulation

Cryptocurrency turnover taxes refer to taxes levied on transactions or activities involving the use of cryptocurrencies. Generally, cryptocurrencies are not subject to consumption taxes due to their lack of characteristics as luxury goods or "harmful items." Additionally, they are considered digital assets rather than physical commodities, making customs duties inapplicable. The discussion on cryptocurrency turnover taxes, as outlined in the July 2023 IMF working paper titled "Taxing Cryptocurrencies," is also limited to this scope. Therefore, cryptocurrency turnover taxes primarily include value-added tax (VAT) and sales tax. This article aims to provide a brief analysis of the taxation of cryptocurrencies under VAT and sales tax in major countries globally.

Different countries or regions may have varying definitions, classifications, and taxation methods for cryptocurrencies. Hence, cryptocurrency investors should consult the relevant turnover tax regulations within their jurisdictions.

2.2 Countries and Regions Imposing Turnover Taxes on Cryptocurrencies

Currently, most countries and regions do not impose turnover taxes on cryptocurrencies, primarily based on how cryptocurrencies are legally defined. Turnover taxes might be applicable only when cryptocurrencies are classified as "goods" or "assets." Countries and regions that categorize cryptocurrencies as "currency" do not subject them to turnover taxes.

2.3.1 Cryptocurrency Turnover Taxes in the European Union

The European Union (EU) holds a leading position in regulating cryptocurrency turnover taxes internationally. As early as the Hedqvist case in 2015, the European Court of Justice ruled that exchange services between legal tender and Bitcoin constitute taxable value-added services.

In the Hedqvist case, a Swedish resident named Hedqvist intended to provide exchange services between legal tender and Bitcoin. The case was referred to the European Court of Justice by the Swedish Administrative Court to determine whether the VAT acquired by Hedqvist in this exchange service needed to be paid. The European Court of Justice determined that since Bitcoin is not a tangible asset, the exchange of legal tender and Bitcoin does not involve the transfer of goods but rather the provision of services. Furthermore,  "consideration" was formed between Hedqvist and the parties in the transaction. Therefore, the European Court of Justice classified the exchange services between legal tender and Bitcoin as taxable services under Article 2(1)(c) of the EU VAT Directive.

Meanwhile, the European Court of Justice believed that the spirit of Article 135(1)(e) of the VAT Directive applies to cryptocurrency exchange. Consequently, the exchange of legal tender for cryptocurrency can be exempt from VAT.

As a result, EU member states, influenced by this precedent, have generally included the exchange of cryptocurrency for legal tender and the exchange of cryptocurrencies within the scope of VAT taxation, while exemptions can be applied. However, the situation is different for mining operations. With the exception of France, most countries (such as Germany, Ireland, Sweden, etc.) consider mining activities not subject to VAT.

2.3.2 General Practices in Other Countries

European countries outside the EU have largely adopted the relevant spirit of the European Court of Justice's ruling in the Hedqvist case, including the UK and Norway. Non-European countries tend to follow a similar approach to Israel, excluding the exchange of virtual currencies from the scope of VAT taxation. Instead, these countries treat the purchase of goods or services using virtual currencies as taxable sales (subject to VAT). Regarding the treatment of VAT for "mining," it remains more diverse and has not yet formed mainstream policy opinions.

Another approach to taxing cryptocurrencies is to entirely exempt them from turnover taxes and instead regulate them from the perspective of income taxes. This approach is exemplified by countries like Singapore, Japan, South Africa, and Hong Kong, China.

3 Future Outlook of Cryptocurrency Turnover Taxes

Cryptocurrency turnover taxes have not yet formed a unified standard or regulation globally. Different countries and regions have significant differences in the definition, classification, recognition, basis for taxation, tax rates, and more, leading to the complexity and uncertainty of cryptocurrency turnover taxes.

Currently, most countries and regions tend to categorize cryptocurrencies under income taxes, taxing the income generated from activities like buying, selling, exchanging, gifting, and donating cryptocurrencies. This article believes that in the future, more countries will lean towards using income taxes or other forms of taxation to collect taxes on cryptocurrencies, compared to turnover taxes. This is because income taxes are more convenient to levy and calculate compared to turnover taxes. They can flexibly adapt to the volatility and innovation of the cryptocurrency market, avoiding tax losses or overburden due to price uncertainty or product diversity. They can also harmonize tax differences between different countries and regions, prevent international double taxation, and promote cross-border transactions. Therefore, income taxes, as opposed to turnover taxes, can better reflect the value changes of cryptocurrencies and taxpayers' ability to bear the tax burden. In comparison, turnover taxes face challenges in terms of collection costs, effectiveness, and fairness.