TaxDAO Hot Q&A: Will mining, trading, and paying U be taxed？

01 Self-Introduction

I'm Calix, I have been engaged in finance and tax work in multiple industries. My intersection with the community occurred in 2017, and I have been responsible for tax affairs in a high-growth blockchain company for several years. Since I started my career in the community, I have experienced two bull and bear transitions and witnessed the revolution and transformation of the industry. These drastic changes have also greatly influenced my own work and life patterns, and at the same time made people look forward to the development of the industry.

02 Why set up TaxDAO and what you want to do?

The market value of cryptocurrencies reached nearly $3 trillion in the latest bull market, and this field is becoming increasingly important and cannot be ignored. At the same time, regulatory systems for cryptocurrency compliance are gradually emerging in various countries. The regulatory direction of these compliance policies is not the same, and tax policies are also of great concern.

The establishment of TaxDAO is not predetermined. Due to my work in this industry, I am very concerned about the development of the industry and cryptocurrencies. When some cases related to finance and taxation emerged, I became very interested. During the process, I constantly collided and communicated with like-minded partners, and the idea of establishing TaxDAO became relatively clear.

We hope to establish TaxDAO to help the community better comply with tax issues. We also hope to use our professional abilities to help the community to come out of a relatively clear path of tax compliance, thereby bridging the gap between tax regulation and the industry. If the process of legislation can be promoted to a certain extent on top of this, collecting information and needs, and speaking out may be more meaningful and valuable for the industry.

As for organizational autonomy, we hope to use DAO, an open platform, to gather more professionals and practitioners interested in the "cryptocurrency industry or tax", to help the industry straighten out its compliance path, and to carry out some basic research and construction at the relatively early stage of industry tax regulation to help the future compliance development of the industry.

03 What do you think of the field of combining tax and cryptocurrency?

1. Coexistence of challenges and opportunities

The rise and development of cryptocurrencies pose a huge challenge to traditional tax collection and management. There is not only a lack of relevant regulations at the tax law level, but also a lack of grasp at the tax collection and management level. The tax management in the cryptocurrency field is a niche and hot topic, and a series of issues such as whether it is the subject of taxation, the determination of tax obligations, the process of tax collection, the acquisition of transaction information, and international tax supervision will become key and difficult points in the future. Behind the challenges lies opportunities. For tax authorities and taxpayers, gaining early insight into future development forms, preparing in advance, and improving tax processing compliance will merit in the present and benefit in the future.

2. Coexistence of uncertainty and certainty

In the current regulatory situation, there is uncertainty regarding whether cryptocurrency can become a tax subject, how to determine tax obligations in the circulation process of cryptocurrency, and how tax authorities can obtain cryptocurrency transaction information, which is a lack of regulatory oversight. This also brings significant uncertainty to cryptocurrency owners, traders, and related parties. Many practical issues have yet to be clarified, such as how to tax in the future, whether it will be retroactive, and how to regulate enterprises and individuals in the industry. On the other hand, major global economies have gradually clarified the taxation of cryptocurrencies. Although there are currently no supporting tax collection and management regulations in China, in the context of gradually strengthening international tax management and personal anti-tax avoidance, the tax management of cryptocurrencies and trading activities will gradually be improved and optimized, which is also a certainty for the future.

3. Coexistence of cognition and action

The field of combining tax and cryptocurrency is currently a fertile ground for research, with various academic research and theoretical discussions in full swing. Relevant tax laws and regulations are still pending. Relevant persons in the industry should have a new understanding and preparation for tax treatment, timely optimize their own tax treatment before the specific regulatory system is improved and determined, understand the spirit of relevant documents, and prepare for response in advance. Only in this way can we protect our legitimate rights and interests in the context of future industry tax collection and management.

04 What are the core areas of cryptocurrency taxation that you are currently concerned about?

We have currently observed that several aspects of crypto assets may involve tax issues.

1. The production or issuance process of cryptocurrency

How can the tax bureau collect taxes on cryptocurrency obtained through mining and whether the corresponding input costs can be deducted? In some energy-scarce countries or regions in Europe, due to the significant energy consumption required for the production of cryptocurrencies, local tax authorities may impose profit tax on the profits generated by mining activities of enterprises. For Russia, a major energy country, mining activities is currently taxed based on the operating income of ordinary enterprises. For the United States, there are currently no unified tax regulations at the federal level, and each state will adopt regulations based on local conditions. Some states with energy constraints will impose corporate and property taxes on corporate entities during the production process. But in states with energy surplus, local tax bureaus will issue a series of tax exemption policies to promote industry development.

2. The transaction process of cryptocurrency

In the transaction process, tax interpretations vary across tax jurisdictions, but overall, taxing cryptocurrency as property is the most common practice. The United States passed a bill in 2014 that explicitly stated that cryptocurrency should be treated as property, and the corresponding appreciation and income should be taxed as property, without considering its monetary nature. The income corresponding to cryptocurrency obtained by the legal entity through mining shall be subject to income tax, and corresponding costs, including electricity bills and movable property equipment expenses, shall be deducted accordingly. In the cryptocurrency trading process, the corresponding value-added part belongs to capital gains, which are taxed according to capital gain. Major European economies such as Germany, the United Kingdom, and France generally believe that income from cryptocurrency transactions should be classified as property transfer income and subject to corresponding income tax or value-added tax.

3. The payment process of cryptocurrency

The tax treatment in the payment process mainly depends on whether the taxation behavior has legal support. Taking Russia as an example, some countries or regions believe that cryptocurrencies can be exchanged for local or foreign currencies and have monetary attributes. Therefore, the payment function is a manifestation of monetary attributes and does not generate tax obligations. Some countries have a relatively vague definition of the monetary attributes of cryptocurrency. Taking Germany as an example, it is clear that cryptocurrency is not a legal tender, but it is allowed for individuals to use cryptocurrency as a means of payment, which is also a manifestation of monetary attributes. Similarly, there is no need to pay taxes in this process. The US Tax Administration's assessment of tax obligations in this stage is relatively conservative, as it regards the use of cryptocurrency payments as a two-part transaction of barter, i.e., the difference between the cryptocurrency payer and the goods or services they obtain is taxed; the cryptocurrency acquirer needs to convert the obtained cryptocurrency into legal tender for taxation.

4. The holding process of cryptocurrency

The determination of tax obligations in the cryptocurrency holding process not only imposes high requirements on the tax law system of tax jurisdictions, but also poses significant challenges to the tax authorities' collection and management capabilities (information acquisition). The US Tax Administration should have strong taxpayer information acquisition capabilities and be able to carry out corresponding tax collection and management work to a certain extent during the cryptocurrency holding stage. Generally, gains obtained from holding for a short period of time (such as within 12 months) are considered short-term capital gains and subject to higher income tax; gains from long-term held investments (held for more than 12 months) is considered as capital gain and are subject to capital gains taxes, which are relatively low.

05 There are many Chinese entrepreneurs in Hong Kong and Singapore, how are they taxed as institutions?

Currently, cryptocurrency-related businesses conducted in Singapore as institutional investors may be subject to income tax of up to 17% on profits made, with a temporary exemption from goods and services tax on cryptocurrency transactions. Cryptocurrency-related businesses conducted in Hong Kong may be subject to a profits tax of up to 16.5% on profits made.

Singapore issued the "Cryptocurrency Income Tax Guidelines" on April 17, 2020, which classifies cryptocurrencies as payment tokens, utility tokens, and security tokens, and provides detailed rules on whether and how gains arising from the acquisition, holding, and disposal of different types of cryptocurrencies in different ways (e.g., good transactions, purchases, airdrops, mining, etc.) are taxable.

On 27 March 2020, the Inland Revenue Department ("IRD") issued the "Departmental Interpretation and Practice Notes No. 39 (Revised)", which stipulates that the tax treatment of transactions in digital assets depends on the nature and use of the digital assets involved. The Hong Kong Inland Revenue Department will take into account the interests attached to digital assets. The specific tax treatment depends on the nature of the asset rather than the form of the asset.

It should be noted that Singapore and Hong Kong currently do not tax income like capital gains arising from the issuance, holding, or disposal of cryptocurrencies. However, if dividends, interest, and other income derived from Singapore and Hong Kong are distributed to investors holding security tokens, the distribution institutions are required to withhold and pay income tax.

06 Last year Chinese tax authorities started to tax some large investors and miners, what do you think of this phenomenon？

1. Modernization of the means of collection and management

Nowadays, tax authorities have more adequate information on taxpayers' data, and it is easier to obtain tax-related data of enterprises or individuals in the industry with higher risks by conducting data matching through a risk assessment system. On the other hand, international tax regulation cooperation is also increasingly strengthened. Tax-related data and information of domestic enterprises and individuals overseas are exchanged back to China through intelligence exchange or technical means such as CRS and CBCR, which further improve the risk assessment data and enable tax authorities to significantly improve their supervision ability for enterprises or individuals in the industry.

2. Limited reference of international experience

At present, tax authorities in major economies such as the United States, the United Kingdom, and Japan have successively optimized the taxation of cryptocurrencies, including the collection of income tax in the circulation and appreciation of cryptocurrencies. Although the legal basis for directly taxing cryptocurrencies in China is not complete and clear, according to the general provisions and legislative spirit of the Cooperate Income Tax Law and the Individual Income Tax Law, the tax authorities’ act of taxing the benefits obtained by enterprises and individuals in the industry in the value chain of cryptocurrencies is also understandable.

3. Inevitability behind the contingency

Although the basis of taxation needs to be further improved, the cryptocurrency transactions are economically exogenous. Combined with the concept that profits should be left in the place where economic activities occur and taxed in the first place of value creation, the taxation authorities have the economic motive and internal drive to tax large investors and miners. Industry stakeholders should make industry insight and regulatory judgments in advance and prepare their thoughts and behaviors to cope with the ever-changing tax management in the future.

07 What is the tax advice for Chinese cryptocurrency startups and individuals?

A lot of entrepreneurial opportunities have emerged in Web3, among which the Chinese occupy a very important position. In general, when an organization or an individual conducts an entrepreneurial project in any region, it is necessary to pay attention to tax compliance or the trend of tax regulation. The characteristics of the industry determine that many web3 practitioners operate their businesses across regions.

Tax compliance is not far from every Web3 practitioner, and if you plan early enough, efficient tax arrangements will help your business thrive. I would like to give a few general suggestions here for your reference:

1. Positioning expectations: Understand your organization's or your views on taxes and the state of expectations to be achieved;

2. Current environment: Understand the current status and latest developments of cryptocurrency regulation in your business area;

3. Proactive planning: Arrange your assets, team, technology, and business rationally in different regions, which not only needs to meet the tax compliance of each region but also needs to maximize the use of some positive tax exemptions;

4. Reverse check: Constantly review the status of your business and how it relates to the tax regulation, and manage it continuously.

The above suggestions may seem empty, but in reality, entrepreneurs will think about the above issues at different stages. If conditions permit, it is suggested that cryptocurrency entrepreneurs can communicate with relevant professionals on the above points as soon as possible. We believe that everyone will gain something in the process.

08 It is also rumored that there is a situation in China where taxes are levied on the USDT payroll. What do you think about this phenomenon?

So far, it's a low-probability practice. There is considerable uncertainty as to whether the payroll issuer will incur a tax liability when it issues wages in USDT, or whether the USDT payroll recipient will incur a tax liability when it accepts the wages. In the latter case, the receipt of wages (obtaining financial benefits in the nature of remuneration) is legally taxable as wages and salaries under the Individual Income Tax Act. However, when USDT is used to pay wages, the commodity and monetary attributes of USDT will have an impact on taxation. If USDT is used as a currency to pay wages, the tax basis of this link needs to be further improved. If USDT is paid as wages as a non-monetary asset, the process is equivalent to barter and it is reasonable to tax under current tax legislation.

Even though the above steps may be taxed in various places in the collection and administration process, it is not representative and generalizable at this stage. And it cannot be inferred that domestic tax authorities will demonstrate the legality and rationality of tax on cryptocurrency at the top-level design level, as the principle of statutory object of taxation and legal taxation is beyond doubt. The bottom line of " may not do anything not authorized by law" cannot be broken. We should view this kind of partial taxation rationally and objectively. It still takes time for the process from point to line to plane. However, as relevant personnel in the industry, we can prepare in advance and recognize in advance, reorganize our tax-related behaviors, improve the compliance of transaction links as far as possible, and plan as early as possible.