OECD Releases Report on Taxing Virtual Currencies
by Krystle Gan and Lisa Zarlenga, co-chairs of GDF’s Tax Working Group
The OECD released a report entitled OECD 2020: Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues, in response to the G20’s discussions for greater clarity on addressing public policy and regulatory risks posed by cryptoassets. The report was published after presenting before the G20 on October 12, 2020.
Background
The report was born out of growing economic activity and mainstream attention on cryptoassets as well as interest in the tax evasion risks initially identified in the OECD’s 2018 Interim Report on BEPS.
The report considers challenges and emerging issues in the area of cryptoasset taxation and offers insights for policymakers to consider, but the objective of the report was not to offer recommendations or best practices. In this regard, the approach of this report was similar to the approach taken by the GDF Tax Working Group in its paper entitled Tax Treatment of Cryptoassets (the “GDF Tax Paper”).
The report covers a wide range of jurisdictions based on questionnaires distributed and received back from 53 OECD member states on their tax regulation of cryptoassets — it is the most comprehensive multi-jurisdictional tax summary to date. The report acknowledges the taxonomy of three cryptoasset categories of payment tokens (aka virtual currencies), security tokens, and utility tokens, citing to GDF’s taxonomy paper entitled Code of Conduct Taxonomy for Cryptographic Assets. However, unlike the GDF Tax Paper, the OECD specifically opts to cover only payment tokens in the paper — which it refers to as “virtual currencies” — due to its prevalent use in the market and presence in regulatory guidance.
Tax Issues and Challenges
The tax treatment analysis of virtual currencies follows a chronological approach of the lifecycle of the token: its creation, storage and transfer, exchange (and/or disposal), and evolution. By taking this approach, different events during each stage is identified, including the possible taxable events and potential tax implications. For example, the creation of a virtual currency can involve several taxable events, including mining, forging, airdrops, or ICOs. This lifecycle approach provided a useful framework to situate the respondent countries, make comparisons, and note policy gaps.
The report then covers different taxes and how the responding members’ tax laws pertain to virtual currencies, including capital gains, corporate, and personal income taxes; VAT; and property taxes like inheritance, estate, gift, and wealth taxes.
The paper identifies the shifting landscape of the cryptoasset industry as a particular challenge for tax regulation, specifically calling out the increased “use, trade and level of market capitalisation of these assets” and the “rapidly evolving” technological features as notable factors.
The OECD considers the nature of currency and how virtual currencies differ, settling on “issuance requirement” as the differentiating factor, in that virtual currencies lack any intrinsic value and are not linked to any underlying commodity or sovereign currency (excluding stablecoins and central bank digital currencies (“CBDCs”)). The report notes that most jurisdictions treat virtual currencies as a form of property and subject them to the normal taxing regimes for such asset types, though there are notable exceptions.
Tax policy challenges and emerging issues are also explored, including determination of fair market value and basis where there are difficulties in the standard assessment of valuing virtual currencies across jurisdictions. In determining the basis, specific identification of units (US), chronological order via the first-in first-out (“FIFO”) principle (Finland), or basis pooling (UK) have been variously applied. The report also identifies forks as an area of disparate tax treatment, where the most common approach taxed upon disposition of the forked virtual currency, whereas the US considers a hard fork as triggering a taxable event even where the token is held for investment. Australia on the other hand determines the tax treatment depending on whether the virtual currency is held for investment or in the course of business as opposed to personal use.
In addition to virtual currencies, the paper acknowledges the rising interest in stablecoins and CBDCs as a marker of growing acceptance from governments and central banks. Stablecoins grew out of the concern to minimize volatility by pegging the token value to a specified asset, or a pool or a basket of assets. Earmarked as an item of particular concern by the G20 on account of the risk to financial stability and monetary policy, stablecoins still experience high volatility in the market.
As for their tax treatment, the OECD suggests that stablecoins should be treated similar to other virtual currencies, which would result in capital gains taxes. CBDCs are also considered as a preferred alternative to stablecoins in that they are fully guaranteed by central banks similar to national currencies and with the status of legal tender. Due to their nascency no tax guidance is available yet. Nonetheless, several countries, including China, France, Korea, are experimenting with CBDCs, and the European Central Bank along with the central banks of Canada, Japan, Sweden, Switzerland, and the UK announced that they are working together with the Bank for International Settlements to explore the issuance of CBDCs.
Decentralized finance, or DeFi, is considered as an evolution of blockchain technology, whereby cryptoassets, financial smart contracts, software/protocols, and decentralized applications (dApps) function as an alternative natively digital financial system. The tax implications have not been considered by most countries, though Australia is one of the exceptions, announcing that disposal of virtual currency as part of DeFi loans constitutes separate capital gains tax events, and the value of tokens received as interest must also be reported.
The report then looks at the evolution of proof of work and proof of stake consensus mechanisms, noting in particular the significant energy use for proof of work consensus mechanisms. The report notes that the fact that individuals’ existing holdings provide the basis for proof of stake validation (but not for proof of work) suggests that the reward may be taxed differently (i.e., as investment income). The OECD cautions tax regulators that taxation may affect the choice of protocol, the number of transactions in each system, and the associated environmental impacts.
Considerations for Policymakers
The OECD concludes by raising some areas for consideration for policymakers in their member states. Not surprisingly, the OECD recommended that policymakers adopt clear guidance, including defining virtual currency, the tax consequences of various events during the lifecycle of virtual currency, and the emerging issues discussed in the report.
More importantly, however, the OECD recommended measures to simplify and encourage compliance, such as by reducing the need for valuations. These simplification measures include:
- excluding crypto-to-crypto exchanges from taxation;
- adopting basis pooling rules;
- ensuring that virtual currency exchanges are not considered barter exchanges under the VAT rules;
- adopting de minimis exemptions for personal use; and
- adopting simplified regimes for small trades or purchases, such as taxing individuals on a basis more similar to foreign currency or providing a personal use exemption for small transactions.
The OECD noted, however, that policymakers would need to balance these simplification measures against tax planning risks.
Finally, the OECD suggested that policymakers consider how the tax treatment of virtual currencies could align with non-tax policy objectives, such as support for cashless or electronic payments or environmental policy objectives.
Next Steps
The OECD stated that it is addressing the need for greater tax transparency in the area of cryptoassets, noting that it is currently developing technical proposals for an “adequate and effective level of reporting and exchange of information” with respect to cryptoassets. The report noted the importance of reporting as a means to promote “both simplicity for taxpayers and improved compliance,” noting that a framework by which exchange platforms are responsible for recordkeeping and transmitting information to the tax authorities may be advantageous. The focus on information reporting and exchange seems like a reasonable next step, as policymakers may be more likely to consider comprehensive legislation and administrative guidance on the taxation of cryptoassets after they have more information on the types of transactions occurring.
Press date : 21.10.2020