Taxing cryptoassets

GM. We're getting super nerdy today and talking about tax! If you let it, tax can be a super interesting policy area...or at the very least not boring. What's fun about this piece is that we're probably going to fight! Awesome, can't wait.

Today's newsletter is 1000 words, or a 7-minute read.

- Erin, @erin_gee

One of the biggest policy questions about Web3, cryptocurrency specifically, is how it will be taxed. After talking with Michelle Rempel Garner about her bill to develop a Web3 regulatory framework, it makes sense to run through some of the tax policy options available to policymakers. 

Canada’s Tax System and Crypto

There are two types of taxes in Canada, sales tax (HST, GST, and PST) and income tax (business and personal). Generally, income tax is taken off at the source (though not always) as is the case for most taxpayers in Canada. For these people, tax returns are simple and they often owe very little or nothing at all, and sometimes even get a tax return. However, if you have capital gains/losses, education credits, or other sources of income to report, your tax return can be more complex. The Canada Revenue Agency (CRA) collects and remits taxes on behalf of all provinces and territories, except Quebec.

Currently, the CRA taxes cryptocurrency as a commodity (same as the US Securities and Exchange Commission), which means that it’s treated as either business income or capital gains. However, each taxpayer needs to determine for themselves whether or not the activities associated with crypto are business activities or capital gains.

Presently, there is no sales tax when using crypto to purchase goods and services because crypto is not considered a legal currency. Instead, these transactions are considered to be barter transactions and subject to those tax rules.

You can read more here.

How Crypto is Taxed Elsewhere

It’s a real choose your own adventure.

United States: crypto is taxed in the same way that stocks are which is “like property”. NFTs are also subject to taxation (capital gains), however, if you’re minting NFTs as a business, then you can write off relevant business expenses, like gas fees—but not if you’re just doing it for fun.

Portugal: capital gains from crypto investments are seen as a form of payment—a currency, but not an asset—and are not taxed so long as they do not serve as an individual’s main source of income. Corporations in Portugal have always had to pay taxes on their capital gains from crypto investments. New tax legislation is expected this fall.

Australia: crypto is taxed as an asset, therefore capital gains and losses are reported to the Australian Tax Office.

South Africa: legislation will be introduced within a year to regulate crypto as a financial asset, making it subject to rules around money laundering, tax evasion, and terrorism financing.

India: the country has issued an interim policy that taxes gains and income from “virtual digital assets,” which definitely includes crypto, could include NFTs, and may include other things, but TBD.

Brazil: New rules tax capital gains on crypto if profits are more than $7200 USD (approx) per month.

South Korea: planned crypto tax reform has been delayed to 2025.

OECD: approved a regulatory framework that could become the G20 standard.

Canada’s current perspective on crypto taxation is very basic. If we think through a process similar to what Michelle Rempel Garner’s bill proposes, a full regulatory framework, then the underlying assumptions that are currently being used in crypto tax policy aren’t relevant. Not only does the current approach only consider cryptocurrency (which they don’t even acknowledge as a currency) and not other Web3 assets, but also because the current policy on using crypto to purchase goods and services doesn’t specify whether or not that is for blockchain transactions or otherwise (I specifically think of a company like Tesla previously accepting crypto).

As it stands, current crypto tax policy views crypto itself as a bunch of magic beans that only matter once you earn fiat currency on it. However, it could be argued that if you sell something on the blockchain you are then also earning income, and likely not an insignificant amount. 

The huge gaping hole in the current policy approach is anything related to NFTs. NFTs are, quite literally, a main source of income for many people and the creator economy is certainly a contributor to the number of job vacancies available (why would a teen or college student want to work a minimum wage job when they can mint some NFTs or start a TikTok account?). 

Tax Policy Options

Here are a few options to broaden/update the current approach to taxation and Web3.

Capital gains: on crypto trades, on NFTs, on anything where a person can see a gain (or loss).

Sales tax: for sales made on the blockchain and only on the original purchase from an artist. For example, I recently bought a nice piece of art from an artist and had to pay HST on it. If I were to re-sell it on Marketplace, I wouldn’t charge HST on it. NFTs (and similar) should be the same way.

Royalty tax: the whole premise of a creator building on the blockchain is so that they receive royalties for their work in perpetuity. In Canada, royalties are subject to a 25% tax rate, why would digital royalties be different?

The thing about taxing Web3 assets is that all the transactions exist on the blockchain which will eventually make tax evasion much more difficult. There are so many things to consider when developing tax policy and this is just scratching the surface.

Here's an unhinged thread about NFTs being better than the printing press