Cryptocurrencies operate in a virtual space that’s safe and reliable enough to secure financial transactions. Virtual currencies don’t exist in physical form and aren’t linked to any bank account. In short, they operate outside the banking system, which is still considering the possibility of introducing cryptocurrencies into banking operations.

Truth be told, the introduction of cryptocurrencies doesn’t depend so much on the banks themselves as on the regulators who regulate the work of banks such as the central banks of individual countries. On the other hand, every country has a legitimate interest in collecting taxes as one of the basic sources of income in order for the state system to function properly.

States Want Their Share of Cryptocurrency Transactions

The tax services of the countries have been challenged to control financial transactions that take place in cryptocurrencies. As one of the basic proclaimed postulates of cryptocurrency is anonymity, the identification of users by the tax administration is a challenge.

The goal of the tax authorities is to identify the participants and the transactions performed and then to collect the appropriate tax. Solving this challenge isn’t an easy task because it requires new mechanisms that would supplement the information capacity of the tax administration.

Instructions From the U.S. IRS

The complexity of the task is best shown by the fact that the IRS (Internal Revenue Service), the US tax service, published an announcement in which it seeks consulting services to support the examination of taxpayers that includes cryptocurrencies. Namely, according to the valid regulations, the citizens of the USA are obliged to inform the IRS about the possession of cryptocurrencies as well as about the executed transactions.

Given it’s difficult to check whether the reports of citizens on this issue are complete, a control mechanism that will check the reports of taxpayers is necessary. The consultants, that the IRS wishes to engage, are expected to provide the expert support necessary to identify and investigate cases where taxpayers’ reporting (or lack thereof) of digital assets is inconsistent with their actual cryptocurrency transactions.

The IRS has issued formal instructions on how cryptocurrencies should be taxed, applying the general principles of tax law. For example, exchanging one virtual currency for another, say Bitcoin for Ripple, is a taxable transaction. By the way, you can check the real-time Ripple price chart and its data at any time. Mining as well as transactions made in cryptocurrencies also create tax liabilities and must be declared as income if they actually represent income.

As with buying stocks traded on a stock exchange, buying or investing in cryptocurrencies doesn’t create a taxable action. But the sale or exchange of cryptocurrency or the receipt of virtual currency in exchange for services rendered or other assets, create an obligation to pay taxes.

Reasons for suspicion that US citizens don’t report the possession of cryptocurrencies, as well as executed transactions, are reports on executed transactions from various crypto exchanges. As an example, there’s a report from the crypto exchange Coinbase, which recorded over six million customers in just one exchange, and among them are less than one thousand taxpayers who reported transactions.

We can conclude that the IRS justifiably wonders who the other account holders are and why they didn’t report any cryptocurrency transactions in their tax returns?

The Situation in the EU

Meanwhile, regulators around the world continue to see cryptocurrencies as a threat, each for their own reasons, and the legal status of cryptocurrencies and their use remains unclear. In the European Union, the European Central Bank has defined Bitcoin as a convertible decentralized currency, but the EU-level banking supervisor, the EBA, has advised banks not to engage in Bitcoin transactions until an appropriate regulatory framework is adopted.

Within the EU, the situation varies from country to country. Thus, for example, in Germany, Bitcoin is classified as “private money” and can be used as a means of payment, but all these transactions are subject to VAT.

We’ll find out in the coming period how the activities of the IRS will affect the further development of crypto exchanges…