The taxation of cryptoassets is far from straightforward. Even if we assume that most tax authorities ultimately want to replicate the tax treatment of equivalent traditional assets, there are a number of factors which make the taxation of cryptoassets particularly complex.
Firstly, the wide array of cryptoassets that exist means that working out how to classify a particular cryptoasset often requires considerable unpacking of its specific features to determine a traditional equivalent – and in some cases there may in fact be no neat traditional equivalent. Applying the existing rules to particular categories of cryptoassets, or establishing new rules, can therefore be nigh on impossible as there will often be assets that straddle different categories and the rapid evolution of such assets means the categorisation can quickly become out of date.
With the vast range of cryptoassets comes a multitude of uses. Further, the same asset can be held by different people for different purposes. For example, a cryptoasset could be used as a means of payment by one person and as an investment by another. The result is that they could come within the scope of numerous different taxes in a given jurisdiction. This makes legislating separately for such assets, which are constantly changing, a potentially endless task. This may well be the reason, at least in part, that many jurisdictions who have engaged with the issue of taxation of cryptoassets have opted to issue guidance on how normal tax rules apply to such assets, rather than attempting to legislate in this sphere.
The question of which jurisdiction has taxing rights over a cryptoasset, which typically exist on a distributed ledger, is a matter which has not been fully resolved. In the absence of internationally agreed principles for the taxation of such assets, the potential for different jurisdictions to take contradictory and overlapping positions is high.
Furthermore, transactions in cryptoassets are notoriously difficult for tax authorities to track given that their very nature means they can be held and transferred without interacting with traditional financial intermediaries, making it challenging for tax authorities to rely on existing mechanisms for ensuring tax compliance. On this last point, the OECD and the EU are now taking steps to tackle this issue on a multilateral level.
In our briefing, available here, we consider a snapshot of some multinational and national approaches to addressing some of these issues.