Each country has its own approach to taxing bitcoin. Most consider bitcoin like property or a commodity. The US is a good example of this approach. What this means is that you buy bitcoin without tax, however you pay capital gains on the difference between your purchase price and your sales price when you sell. This is exactly what happens when you sell a house, a stock or a bond.
However, some countries have been more aggressive, taxing when your buy AND when you sell. Japan was one of those countries, charging a type of sales tax when buying bitcoin. And, of course, taxes on the gains as well when the bitcoin was sold.
Japan Changes Course for the Better
In Japan, 8% is charged on all purchases (and that increases to 10% in late 2019). Bitcoin was subject to that tax as well. However, a recent tax reform bill that was just passed eliminated this sales tax, called a consumption tax, on bitcoin effective July 1, 2017.
This is a big win for bitcoin in Japan. It moves bitcoin, and other digital currencies, a step closer to being consider a true currency. Yet, some other countries still charge this type of consumption of value-added (VAT) tax.
Germany’s More Enlightened Approach
In Germany, bitcoin is treated quite differently that in most other countries. In 2013, the German Finance Ministry declared that bitcoin was a “unit of account”, one of the key characteristics of currency and of money, and considered to be a type of “private money”.
Bitcoins are still considered assets subject to capital gains tax. However, they are only subject to this tax on profits obtained within a year of acquiring the bitcoins, at a rate of 25%. If you hold the bitcoins more than a year, any sale of the bitcoins is considered a non-taxable “private sale”. This is a big shift in the way bitcoins are treated.
Frank Schaeffler, a member of the German parliament’s Finance Committee, took it a step further. He said, “we should have competition in the production of money”. Continuing on, he said, “I have long been a proponent of Friedrich August von Hayek scheme to denationalize money. Bitcoins are a first step in this direction.” His committee has pushed for legal classification of bitcoins, and other digital currencies, as being a type of currency. This goes a long way to legitimizing the importance and value of digital currencies, and especially of bitcoin.
Treating Bitcoin as a Currency
This leads us to where most of us would like to see bitcoin go. That is, to see bitcoin fully treated as a currency.
Imagine traveling to a foreign country and trading your home currency for the local currency. When in the foreign country, you use their local currency to buy food, drink, hotels, gifts, etc. And then, when you return home, you exchange whatever foreign currency is left for your home currency.
With bitcoin, each transaction must be accounted for in your home currency for tax reasons. And, any increase or decrease at the time of spending the bitcoin must be considered for capital gains. That is, each type you use bitcoin as a currency, it is first treated as a commodity for taxation, subject to gains or losses. Then, you can use it at that adjusted value as currency. This is ridiculous and may have been designed, by the central banks, to slow down the adoption of bitcoin as a viable currency.
Imagine if you had to track the increases and decreases between the US Dollar and the Euro each time you bought or sold something when visiting Europe, or when visiting from Europe to the US. Not only would you need to be aware of the exchange rate for currency value, but you would need to determine the basis price, or the price at which you bought the foreign currency and the value at the time of the transaction. This negates the amazing value of currency, by trying to treat it as a commodity.
The Real Solution
The only real solution is to treat bitcoin as a currency, like any world currency. If you are investing in it for long-term gain, then treat it like a forex (foreign currency exchange) transaction. If you are exchanging your home currency for bitcoin to use in transactions, then treat it as you would any other currency and don’t tax it at the time of its use. This is where all digital currencies need to go, just as Germany’s Frank Schaeffler suggests.
So, what the future? It’s anybody guess. However, I am placing my bet on digital currencies being treated more and more as a “foreign currency” for trading, taxation and exchange. This may be especially important as global economies hit the end of the current expansion cycle. The world economies are overdue to a pullback. This may just be what bitcoin needs to drive its value, and more importantly its adoption as a currency, forward.
As for whether bitcoin currency will ever be “money,” that is up to the people to decide!
Marc Carignan is founder of The Bitcoin Tutor, a company dedicated to helping people learn about and profit from the future of money. To learn more, visit http://thebitcointutor.com.