The Chinese tax publication, China Tax News called for taxing past cryptocurrency profits using the Ex post facto law, also known as the principle of “law is not retroactive”. This means that the services provided by overseas exchanges to residents of China before the official crypto ban will now be required to pay tax in accordance with China’s tax law, on their income from China before the government officially announced the decentralized markets’ illicit status in the country.
During the month of September, ten ministries and commissions along with the Central Bank issued the “Notice on Further Preventing and Disposing of the Risks of Virtual Currency Trading Hype” against foreign crypto exchange organizations in China. It laid down the legal framework that specified, “the provision of services by overseas virtual currency exchanges to Chinese residents through the Internet is also an illegal financial activity.”
“After the promulgation of the ban, some domestic trading platforms chose to “go overseas” to provide domestic users with related trading services in the form of “overseas institutions”, and gradually formed an exchange industry led by Binance, Huobi, and Ouyi. With the popularity of the virtual currency market in recent years, the transaction volume of related platforms has increased rapidly. The total 24-hour transaction volume of spot and derivatives on the top platform even exceeds one trillion yuan, which is close to the single-day transaction volume of the A-share market.”, stated China Tax News.
Unclear Crypto laws in China
However, the Chinese Journalist, Colin Wu argues that since China’s Central Bank had defined all crypto activities as illegal, taxation could indirectly recognize their legalization. Furthermore, even predate taxation still invalidates the government’s stance, as Chinese authorities had already defined crypto as illegal several times before the official PBOC notice.
China’s tax official newspaper called for a tax on crypto and said that the exchange’s taxation scale was very large. But since the PBOC defines all of crypto activities as illegal activities, taxation seems to indirectly recognize their legalization. https://t.co/SZCX5KuiB7— Wu Blockchain (@WuBlockchain) October 20, 2021
Additionally, the China Tax News also stated that within the current legal framework, China has not banned individuals from holding cryptocurrencies such as Bitcoin. However, the transaction of virtual currencies is marked as an “invalid civil act”, which means its not explicitly prohibited by law. This raises manifold questions on China’s crypto stance, and on the government’s unclarity and contradicting crypto laws.
U.S. Senators Seek to Amend New Crypto Tax Rules
A separate bipartisan bill aims to soften new cryptocurrency tax reporting requirements.
Senators Ron Wyden (D-OR) and Cynthia Lummis (R-WY) want to make tax reporting rules introduced in the infrastructure bill more lenient for cryptocurrency brokers, Bloomberg reports.
President Joe Biden is expected to finally sign the $1 trillion legislation into law this Monday after months of heated debates.
The legislation was widely criticized by the cryptocurrency community because of its tax reporting provisions that affect miners, wallet developers and other groups of participants.
Businesses will also be required to report crypto transactions that exceed $10,000.
Cryptocurrency-focused lobbying groups were close to amending the bill, but a last-minute dispute over military spending thwarted their plans.
By narrowing the rule, Wyden and Lummis’s bipartisan bill fix proposed by the two lawmakers aims to exclude individuals developing blockchain tech, according to Wyden:
Our bill makes clear that the new reporting requirements do not apply to individuals developing blockchain technology and wallets.
Treasury Secretary Janet Yellen supported amending the cryptocurrency provision in the infrastructure bill. Hence, the industry is pinning its hopes on the Treasury’s favorable interpretation of the term “broker.”
The new rules are expected to come into effect in 2024.
US Authorities Are Working to Eliminate This Crypto Tax Loophole
The chief tax-writing committee of the United States House of Representatives, the Ways and Means Committee has proposed to include the wash trade law to the controversial crypto clause in the U.S. Infrastructure bill. Last month, the Ways and Means Committee published a summary report, adding cryptocurrency to the list of entities that come under the wash sale rule. While wash trading is the most popular loophole for traders to prevent paying massive taxes on their profits, but it may soon be taken away from them if the Ways and Means Committee proposal is passed.
The tax-writing committee noted that the decentralized sphere did not exist when the wash sale rule was first implemented, hence the law doesn’t apply to the crypto industry yet. However, the authorities argued that cryptocurrency operations are like stocks & securities and therefore, the wash trade law that applies to stocks & securities should also be a legal requirement for crypto traders. Furthermore, the elimination of the crypto tax loophole would add an eminent revenue stream for tax generation, which can also be used to fund the infrastructure bill. If the Ways & Means Committee suggestions are adapted, cryptocurrency trades occurring after December 31, 2021, will be subject to the wash sale rule.
“This section (Sec. 138153) includes commodities, currencies, and digital assets in the wash sale rule, an anti-abuse rule previously applicable to stock and other securities. The wash sale rule in section 1091 prevents taxpayers from claiming tax losses while retaining an interest in the loss asset”, states Sec. 138153 of the Ways & Means summary document.
NFTs also use the Wash Trade Loophole
Earlier this month, Coingape reported on the Founder of Kynikos Associates, James Steven Chanos’ critique on the trending NFT industry, comparing the tokenized market strategy to “wash trading”. He asserted that traders can conveniently set a false, inflated market price, only to then issue another set of NFTs later, at a seemingly prominent discount, to trigger massive buying. Chanos argued that the NFT sphere has been overflown with “nefarious activity” and conflicts of interest.
South Korea: Opposition’s Bill against Crypto Tax aims to delay the implementation
After internal disputes regarding the controversial crypto taxation law in South Korea, now the opposition has also hopped on the anti-crypto tax wagon with its exclusive bill. The People Power Party has drafted a proposal to tone down capital gain taxes on cryptocurrencies and will reportedly submit the bill by tomorrow itself.
The bill proposes the postponement of the crypto taxation law by one year, i.e., 2023. Furthermore, the bill also seeks a steep fall in the tax percentage enforced on cryptocurrency incomes according to the present law.
“It is not right to impose taxes first at a time when the legal definition of virtual currency is ambiguous…The intention is to ease the tax base to the level of financial investment income tax so that virtual currency investors do not suffer disadvantages.”, The Korea Herald quoted Rep. Cho Myoung-hee of the People Power Party.
Authorities determined to prevent delay in Crypto Tax implementation
Last week, Deputy Prime Minister and Minister of Strategy and Finance, Hong Nam-ki took a firm stance and reinstated that the implementation of the South Korean law for taxing income from virtual asset businesses will not see any postponement to the scheduled date, i.e., 2022 onwards. The government of South Korea is against any further delay, arguing that the move has come in lieu of maintaining legal and financial stability.
While former announcements saw the Democratic Party of Korea continue discussions on the postponement of taxation through the Virtual Asset Task Force, yet this will be the second official statement in a row confirming no further delay in the crypto taxation period. According to official statements, the cryptocurrency taxation policy will be implemented on January 1 next year, which will impose a 20% tax on the profits of the transactions.
At the latest parliamentary audit by the National Assembly’s Planning and Finance Committee, Hong Nam-ki noted, “It is judged that it is difficult to re-adjust or postpone the taxation of virtual assets in terms of legal stability or policy reliability…We believe that the taxation infrastructure for the use of real-name accounts is in place, and virtual assets traded through exchanges are sufficiently taxable,”.