The Organization for Economic Co-Operation and Development (the “OECD”) recently released its long-awaited report on global regulatory frameworks for the taxation of cryptocurrencies. In it, they outline current and emerging issues with the global taxation of virtual currencies and offer guidance on policy development for its tax treatment and associated reporting standards.
Tax policy remains a hot topic in the cryptocurrency space, especially with the approximate market capitalization of these currencies hitting an all time high at USD 390 billion as of October 2020. As such, the OECD’s report is a welcome reminder to governments of the importance of maintaining consistent, coherent, and transparent tax policies. In Canada, cryptocurrencies are treated similar to commodities for taxation purposes. This means that income from cryptocurrency transactions may be classified as business income or capital gains depending on the level of activity with the cryptocurrency.
Cryptocurrency Recommendations
The OECD’s new report cover three main areas:
Key definitions and concepts in cryptocurrency such as blockchain and crypto assets.
Emerging issues related to the taxation of cryptocurrencies such as the rise of stablecoins, central bank digital currencies (CBDCs), evolution of consensus mechanisms in blockchain technology, and development of decentralised finance.
Policy recommendations developed from a comparative review of 50 jurisdictions’ tax policies as they relate to cryptocurrencies.
One key recommendation from the report is that policy makers should consider the tax consequences of cryptocurrency across different stages of its lifecycle, from mining to disposal. Currently, countries around the world tax the various life cycles of owning cryptocurrency differently, which causes difficulty when tracking (and taxing) transfers of the currency over different jurisdictions. For example, the Internal Revenue Service in the United States of America treats the rewards developed from a mining transaction as ordinary income whereas Australia’s tax office treats this activity as a capital gain, if the mining operation is not a business. These areas of non-alignment create a tension when it comes to enforcing a jurisdiction’s regulatory framework, especially as it relates to existing tax treaties and residency requirements.
Other important recommendations from the report include encouraging policy makers to outline the rationale behind the taxation of certain events or definitions of taxable assets. These rationales can ensure consistency when interpreting the law in the fast-changing cryptocurrency space. Likewise, the OECD recommends that consideration be given to individuals who are occasional or small traders who do not pursue the activity in a business capacity. Simplified rules for these types of individuals could improve compliance and ensure clarity.
When designing all these new policies, especially as they relate to emerging technology such as CBDCs and stablecoins, the OECD emphasizes that policy makers ensure that the tax treatment of cryptocurrency be in line with the tax treatment and policy objectives of other non-virtual assets.
Countries are expected to review the OECD’s guidelines as a first step in its policy-making process. It is yet to be seen how Canada will incorporate these new guidelines into its tax policies.
If you have ever been involved with mining of cryptocurrencies or cryptocurrency transactions in general and are being audited by the CRA or have questions, contact our office today. Expert tax law advice can help ensure that you are meeting your reporting requirements. Additionally if you believe you have not properly disclosed this income on your tax returns in the past, the Voluntary Disclosures Program may be available to correct your past errors or omissions. Call us today, we are here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a lawyer.
Jason Rosen is a founding Partner at Rosen & Associates Tax Law. Jason provides effective and aggressive representation by taking a proactive, client centered approach for his domestic and international clients alike. Throughout his time in the field, Jason has gained a comprehensive understanding of tax procedures and the dispute resolution process.
Tyra Yah
Tyra Yah is a summer student at Rosen & Associates Tax Law.
Tyra is entering her final year at the Queen’s University Faculty of Law. During law school, Tyra worked as a Case Analyst at the Conflict Analytics Lab, analyzing employee vs. independent contractor cases litigated at the Tax Court of Canada. She was also the President of the Queen’s Law Tax Society, volunteer at the Queen’s Legal Aid Clinic, Project Lead for a Pro Bono Students Canada research project, and External Director of the Queen’s Asian Law Students Association, which won the Professional Excellence Award for their contribution to the legal community.
Cryptocurrency and the OECD
The Organization for Economic Co-Operation and Development (the “OECD”) recently released its long-awaited report on global regulatory frameworks for the taxation of cryptocurrencies. In it, they outline current and emerging issues with the global taxation of virtual currencies and offer guidance on policy development for its tax treatment and associated reporting standards.
Tax policy remains a hot topic in the cryptocurrency space, especially with the approximate market capitalization of these currencies hitting an all time high at USD 390 billion as of October 2020. As such, the OECD’s report is a welcome reminder to governments of the importance of maintaining consistent, coherent, and transparent tax policies. In Canada, cryptocurrencies are treated similar to commodities for taxation purposes. This means that income from cryptocurrency transactions may be classified as business income or capital gains depending on the level of activity with the cryptocurrency.
Cryptocurrency Recommendations
The OECD’s new report cover three main areas:
One key recommendation from the report is that policy makers should consider the tax consequences of cryptocurrency across different stages of its lifecycle, from mining to disposal. Currently, countries around the world tax the various life cycles of owning cryptocurrency differently, which causes difficulty when tracking (and taxing) transfers of the currency over different jurisdictions. For example, the Internal Revenue Service in the United States of America treats the rewards developed from a mining transaction as ordinary income whereas Australia’s tax office treats this activity as a capital gain, if the mining operation is not a business. These areas of non-alignment create a tension when it comes to enforcing a jurisdiction’s regulatory framework, especially as it relates to existing tax treaties and residency requirements.
Other important recommendations from the report include encouraging policy makers to outline the rationale behind the taxation of certain events or definitions of taxable assets. These rationales can ensure consistency when interpreting the law in the fast-changing cryptocurrency space. Likewise, the OECD recommends that consideration be given to individuals who are occasional or small traders who do not pursue the activity in a business capacity. Simplified rules for these types of individuals could improve compliance and ensure clarity.
When designing all these new policies, especially as they relate to emerging technology such as CBDCs and stablecoins, the OECD emphasizes that policy makers ensure that the tax treatment of cryptocurrency be in line with the tax treatment and policy objectives of other non-virtual assets.
Countries are expected to review the OECD’s guidelines as a first step in its policy-making process. It is yet to be seen how Canada will incorporate these new guidelines into its tax policies.
If you have ever been involved with mining of cryptocurrencies or cryptocurrency transactions in general and are being audited by the CRA or have questions, contact our office today. Expert tax law advice can help ensure that you are meeting your reporting requirements. Additionally if you believe you have not properly disclosed this income on your tax returns in the past, the Voluntary Disclosures Program may be available to correct your past errors or omissions. Call us today, we are here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a lawyer.
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