Kat Moon in CRYPTO
Aug. 1, 2022

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Are you prepared for crypto taxes?

EU is preparing a directive to tackle crypto taxation - double reporting from crypto holders and crypto services. This is what is in the making for 2024...

Are you prepared for crypto taxes?

When it comes to investing in crypto and taxes, traders should keep in mind that tax regulations on cryptocurrencies vary from country to country. In most countries, especially in the EU, buying and selling crypto for a fiat currency like EUR or USD is considered a taxable event. 

However, profits on crypto assets are subject to self-reporting alone when filling personal taxes.

As crypto goes from bull market to bearish sentiment, the European regulators have been busy drafting new crypto taxation. 

So what is the forecast on crypto taxation? Capital gains tax on crypto is in the making, and this is what the future holds for the digital asset. 

European regulators have been busy lately, putting digital assets on the agenda. Long enough, it has been an undefined and slippery ground for taxation, but the grey zone seems to be over soon. 

Nowadays, most crypto holders in Europe are asking what the European DAC 8 Directive on taxation of crypto assets will bring. The proposal is currently in discussion. 

One thing is sure; it will legally oblige exchanges and other crypto service providers - like ewallets Skrilland Neteller- to report their customers' transactions to EU member states' authorities. 

Some say this is it will keep the free spirit of crypto. Others that it will finally skyrocket digital assets to mass adoption.  

In times of negative interest rates, crypto was like a paradise island for risk-prone investors and yielded much higher gains than ordinary income. Moreover, it enabled financial freedom for everyone, not just the economic elites. But now, this freedom comes with a responsibility - for now in the EU member states. 

What is the DAC 8?

Many have argued that crypto needs to be regulated as any other asset if it wants to gain mass adoption. Plain and simple, it needs to be taxed. 

This is where the EU Commission comes in. DAC 8 is the eighth amendment of the "Directive on Administrative Cooperation" to regulate brother aspect of the tax issues of crypto assets. Once the Directive is in place, EU member states will have to embed it into its national law - probably by 2024. 

Many questions are open now, like the general tax rate on crypto income and gains, and short-term capital gain vs. long-term capital gain. 

How will crypto taxation work in the EU? 

The central premise is that you need to pay taxes from your income gains if you are trading crypto. Most exchange platforms and ewallets like Skrill and Neteller display the information on your gains and losses compared to your initial investment. In some cases, banks collect the capital gains tax from their clients' holdings and deliver them to the tax authorities.

Where you are taxed depends on your residency within the EU. Every crypto asset holder will have to pay taxes on their crypto profits as a variable income tax or fixed capital gains tax. But there is also good news. There can be a holding period after which gains are tax-free. 

At the moment, regulations vary greatly among the EU Member States. However, they have the basic premise in common - the crypto holder must report gains to the tax authorities. 

But that is not all. From 2024, reporting obligations wil be on both sides: the crypto holder and the institution will have to report on individual's crypto gains. 

Is double reporting a good idea? 

To some extent, double reporting is reasonable. 

Until now, the obligation to report taxes in crypto rested on the asset holder to volunteer that information. Making the institutions report tax-relevant data of their customers creates a clever system of checks and balances.

Dr. Max Bernt, Chief Legal Officer of Blockpit

Double reporting by institutions and individuals makes sense, but it also might create potential problems if reporting standards for tax purposes are not in place. 

One key element of the DAC 8 Directive will be to add institutional reporting to the regulation of the EU Member States. 

How to keep track of your crypto transaction history?

As EU citizens will have to report on their crypto income, having a tax professional on their side is probably beneficial for individual's tax hygiene. Whether you are a professional trader or an occasional investor, cryptocurrency tax will hit anyone using a cryptocurrency exchange or buying crypto with an ewallet like Skrill and Neteller. 

Especially professional crypto traders will have to be extremely careful in keeping their records straight. If doing the reporting manually, enter every taxable event or cryptocurrency transaction into a spreadsheet. Or, use crypto tax software like Blockpitto monitor your transactions and generate a tax report. Blockpit's software imports your crypto transaction data and automatically classifies it following your national legislation and tax requirements so that you have a complete image of your tax liability. For now, Blockpit works like a charm with Bitpanda, and it can even sync with your trading account for a real-time overview. You can generate reports of your taxable income from cryptocurrencies in a few clicks. 

Hopefully, cryptocurrency exchanges will adjust reporting on crypto gains and capital loss, so that EU clients can use those for tax year reports to authorities.

Crypto reporting is not straightforward 

Institutions that will be obliged to report on their clients' gains are the so-called "Crypto-Asset-Service-Providers" (CASP), basically, all organizations that service customers by processing crypto transactions, such as crypto exchanges. 

Does the new regulation include crypto ATMs and brokers? Yes, it does. Capital gain from ATMs or via brokers is taxable as gains from crypto exchange platforms. 

The top European exchanges are Coinbase, Bitpanda or Bitstamp. But it also affects all organizations with a license in Europe, like the Hong Kong-based Binance, as they have a European license in France. 

If a crypto exchange does not have a license in the EU, it will not fall under the obligations of the crypto tax directive. 

Will regulation create a deeper gray zone? 

That's the million-dollar question! 

Crypto investors familiar with crypto transactions will find its ways into unregulated projects. In addition, crypto companies are not always crypto service providers, and plenty of decentralized players in crypto. 

While the purpose of DAC 8 is to catch those evading tax, the ingenuity in crypto might be too complex for regulators to imagine. Tax authorities will compare self-reporting data and cross-check it with institutional reports - making tax reporting a mission impossible. 

But it will not be as easy as it sounds as crypto assets travel from one exchange to another, between different wallets within and outside the reach of the EU. Two facts to keep in mind:

  • only EU-licenced Crypto-Asset-Service-Providers are to report to national tax entities
  • only gains are subject to tax
  • self-hosted wallets are not subject of reporting 

Thus, the reporting chain is quickly broken, and crypto gains are not easily established, especially if the national tax officers lack knowledge and understanding of crypto transactions and, overall, lack the bigger picture of decentralized assets. 

Start planning for the future of crypto taxation

Despite the general sentiment that cryptocurrency tax is against the nature of the decentralized nature of crypto, taxation might be able to remove the final obstacle for institutional investors. Banks and other financial institutions have been reluctant to invest in crypto due to strict controls and compliance measures with central banks. 

The DAC 8 is to be finalized by November 2022 and planned to step into effect in 2024. The first cryptocurrency tax reports for EU citizens are expected in 2025 for the calendar year 2024. 

Thus, crypto taxation might just bring a super bullish run for Bitcoin, Ethereum, and digital assets resilient enough to hold through the stormy weather of the bearish season. As it is foreseen to step into power in 2024, this just might coincide with the next bull market.


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