One of the Founding
Fathers of the United States, Benjamin Franklin, once said: “But in this
world, nothing can be said to be certain, except death and taxes.”
While this phrase was realized in 1789, the same still holds true today.
The only difference is that taxes are slowly but surely catching up
with crypto assets.

Therefore, it shouldn’t come as a surprise
that Big Four accounting firm PricewaterhouseCoopers has just released
its first annual Crypto Tax Index as part of the “Global Crypto Tax Report.” The
detailed report contains the latest global crypto tax developments,
along with crypto tax information for over 30 jurisdictions.
Interestingly, 61% of jurisdictions surveyed have issued guidance on the
calculation of crypto capital gains and losses for individuals and
businesses.

The
survey’s Crypto Tax Index ranks jurisdictions based on the
comprehensive structure of their tax guidance. The report shows that the
tiny yet innovative European country of Liechtenstein tops this year’s
rankings, closely followed by Malta and Australia. 

Crypto assets are finally taken seriously

Peter
Brewin, a tax partner at PwC Hong Kong and a report contributor, told
Cointelegraph that the industry is finally starting to see more activity
by some of the supranational policy setters like the Organization for
Economic Co-operation and Development. As a result, tax authorities have
been showing an increasing interest in crypto assets, but these
guidelines are dated:

“What our research shows is that
the guidance issued by many tax authorities is already getting dated.
Yes, it is important that people know how to account for tax on the
trading of Bitcoin and other cryptocurrencies, but that is really crypto
tax 101.”

Although basic guidelines have been established on how to tax common crypto assets,
Brewin points out that loopholes remain. “What we really need, and
which is lacking in nearly all jurisdictions, is principles-based
guidance that is fit for the new decentralized economy,” he said.

That
being said, one key takeaway from the report is that no jurisdiction
has issued guidance yet on topics that are shaping the future of an
economy built around digital assets. For instance, there are no taxation
guidelines when it comes to crypto borrowing and lending, decentralized
finance, nonfungible tokens, tokenized assets and staking income.

This is alarming, considering the recent rise of DeFi and billions of dollars are being locked in DeFi contracts,
as criminals may exploit the hype. While impressive, the PwC report
highlights that without guidance, innovative companies and startups will
be faced with significant tax uncertainty, especially in regards to
cross-border activities.

The document provides some
recommendations; for example, when it comes to the taxation of DeFi,
it’s mentioned that this should include how income from the DeFi
platform is taxed at the recipient level and whether jurisdictions may
seek to tax payments at the source. This is similar to how withholding
taxes are commonly applied to interest payments in traditional finance.

The
report also takes into account the crypto industry’s ever-changing
ecosystem, therefore, noting that future guidance should be
principles-based and not overly prescriptive.

Crypto still primarily viewed as property

Another
important finding in the report is that most jurisdictions view
cryptocurrencies as a form of property from a tax perspective. In fact,
very few consider digital assets as currency for taxation purposes. The
report notes that this is because the disposal of property is considered
similar to a barter transaction; therefore, results in a gain or loss
could be subject to tax.

Yet this isn’t the case in all jurisdictions. For instance, countries such as Israel are starting to propose that Bitcoin should be taxed as a currency. If this proposal becomes a law, digital currencies such as Bitcoin (BTC) could be taxed at a lower rate in Israel than those currently in place.

Although,
having cryptocurrencies taxed as a currency could also result in
challenges. The report points out that a tax change could potentially be
triggered each time an individual spends a digital asset. This is
problematic because many consumers are not able to calculate their gains
or losses from each of their daily transactions. This is generally not
the case with fiat but could be if cryptocurrencies were to be used,
resulting in another barrier to mass adoption.

Tax uncertainty will create challenges

Overall,
PwC’s crypto tax report shows that while significant work has been done
to provide guidance for the taxation of digital assets, the industry is
not up-to-date with recent developments. In turn, businesses will
continue to be faced with tax uncertainty, creating further challenges
for adoption and innovation.

While this may be, authorities are
aware of the fact that new crypto taxation guidelines are needed. Mazhar
Wani, fintech leader at PwC U.S., told Cointelegraph that while it’s
tough to estimate when official guidance will be issued in regards to
topics like DeFi and staking, these points are being discussed by global
tax authorities. “The OECD is also looking at many of these points
since it falls within their broader initiatives, so we hope to see
something soon,” he said. However, Brewin points out that when it comes
to DeFi, taxation clarity could take much longer:

“Particularly
when you have a fully decentralized platform, it’s not clear to me that
approach will work, given that you are dealing with a completely
different animal. We’ve not really seen a parallel for this when it
comes to tax.”

Although this may be, Brewin suggests that
today’s challenges can be overcome if the industry continues to work
with policymakers to ensure that they understand the complexity and
ever-changing nature of the crypto industry.