Tamper-proof transactions, lower transaction costs, greater financial inclusion—digital currency can deliver many things to a business operating in international markets. However, “crypto” can bring negative consequences as well, such as fines and legal scrutiny. And this varies from market to market across the chain from issuer to purchaser.
In Mexico, for example, March 2018 regulations stipulate that companies issuing digital currency must inform clients about possible volatility, the risk of fraud, and that transactions may not be reversible. And in the United States, the IRS sent a letter to 10,000 digital currency holders who failed to pay taxes on their crypto gains.
As digital currency like bitcoin moves from novelty to norm—and nations, industries, and companies increase their adoption of digital currency—the regulatory climate is a work in progress. This means that companies with cryptocurrency in their business model have more criteria to add to their list when evaluating a new international market.
Specifically, it’s important to consider the crypto-friendliness of a market, how digital currencies and gains are treated from a tax standpoint, and what’s on the horizon for laws and regulations.
How crypto-friendly is the market?
Given varying levels of technology adoption—and varying levels of concern about crypto’s negative applications, such as money laundering—some countries are more welcoming of digital currency than others.
A digital currency-focused business with eyes on Switzerland may be in luck. Thanks to a pro-business environment, low taxes, and accessible, this nation has been home to cryptocurrency pioneers such as the Ethereum Foundation and digital currency powerhouses such as The Libra Foundation, which includes Facebook, Andreessen Horowitz, and Thrive Capital as founding members. The Crypto Valley Association, an association of fintech ventures and individuals actively convenes in the town of Zug—Switzerland’s version of Silicon Valley–and advocates for the cryptocurrency sector.
Other jurisdictions, such as Jersey in the United Kingdom, are proactively positioning themselves to encourage business and innovation in digital currencies. Here policymakers are hesitant to enact regulations that could be over-burdensome and are focusing laws primarily on countering the laundering of money and the financing of terrorism.
On the other side of the spectrum, some nations are “just saying no” to digital currency, in certain applications or in their entirety. China has taken a tough, and sometimes contradictory, stance on cryptocurrency, and Vietnam has since 2018 banned digital currency’s use in payments. Bolivia and Ecuador have banned bitcoin and other alternatives to official state currency entirely.
How are digital currencies and gains treated from a tax standpoint?
Just as acceptance and treatment of cryptocurrency varies from nation to nation, so do the tax implications. And this can have big ramifications for international expansion plans.
Singapore, for instance, taxes the profits from buying and selling virtual currencies as income but levies no capital gains tax. Israel, by contrast, views virtual currency as “an asset,” and Switzerland requires that wage income received as cryptocurrency be declared as income tax
For reporting, Argentina taxes income generated from a cryptocurrency transaction in a manner similar to revenue generated from the sale of securities and bonds. Meanwhile, on the other side of the world, Australia treats transactions “akin to a barter arrangement, with similar tax consequences.”
These are complicated issues, requiring the guidance of a local tax expert. Some places to start: What will you be using the cryptocurrency for? Tax treatment may differ if you’re investing company funds, customer conducting transactions, or compensating employees. Often the tax residency status of your company may impact crypto taxation as well.
What’s ahead?
Crypto-minded global companies need to keep a keen eye on the future as well. As digital currency’s potential, and potential risks, have become clearer, attention from regulators has intensified.
In the United States, we’re seeing increased lobbying—e.g. in the U.S. “More than half of the 80 firms that reported lobbying on fintech in the first quarter listed blockchain and cryptocurrencies, including tax elements of the latter, among their biggest concerns,” wrote Roll Call in November 2019.
“I do think Mark Zuckerberg’s testimony got a lot of people worried of a bigger retaliation from regulators” Alex Mashinsky, chief executive of New York-based crypto lending platform Celsius Network, told Forbes magazine.
Amid concerns related to tax, data security, monopoly powers, and more, there have been calls for international standard-setting, and previously unregulated nations, such as France, moving towards regulatory regimes. As 2020 unfolds, the best guidance may be: Watch this space.
Specialized consultants and advisors can help you stay current with regulations in emerging markets, including those governing cryptocurrency, and find the best solution for you, contact us.