The maze of capital gain taxes has led to the financial ruin of two cryptonians, one who invested in eth from Israel and another who invested in bitcoin from Sweden.
“In 2017 they passed a law which makes crypto legal but which also leaves loopholes easy to fall into especially by not being able to fully comply with the requirement to prove for every trade the source of it all the way to the first fiat going in, otherwise you’ll have to pay taxes as if you bought it at the price of zero,” an etherean says.
He claims he will have to pay 400% of his profits rather than the usual 25% for Israel because he failed to engage in proper tax planing.
That means every purchase and sale of what appears to be a trader has to be tracked back all the way to 2014 when he first entered crypto, otherwise tax authorities take the cost as being zero.
As an example, if you buy bitcoin at $10,000 and sell it at $12,000, then your profit is $2,000 minus 25% in capital gains ($500).
If you can not show you bought bitcoin at $10,000, tax authorities in Israel would consider your profits to be $12,000. Meaning he will have to pay $3,000 in capital gains, significantly more than all of his profits.
In Sweden too a bitcoiner who traded with about $2.5 million since 2014 claims he will have to pay 300% taxes on his capital gains.
He has taken the Swedish tax authorities to the tribunal, with the Swedish Tax Agency stating:
“We find that we have a good basis in these investigations where we made assessments about business activities.”
The problem appears to be that every trade is a taxable event. So if you turn your bitcoin into eth or doge chasing 10xes in different crypto exchanges over many years, you can quickly lose track of where the money came from for each specific trade.
Considering quite a few exchanges have also gone down, it can be impossible to find records, with peer to peer and over the counter (OTC) trading also potentially making it difficult and at times impossible to prove that a bank transfer to an individual was in exchange for crypto.
In Germany, after one year of hodling there are no capital gain taxes, simplifying the maze considerably, but in Israel and Sweden some have apparently fallen into a trap.
No legislative authority has looked at crypto taxes as far as we are aware in any country, with unelected bureaucratic agencies simply extending their jurisdiction to cryptos, applying the same capital gains, but in this case for every trade.
Logically you would think the only thing that matters would be the initial buying price and the final selling price, but linking those to the movement of fiat in and out can be difficult as usually exchanges do not give a receipt for the purchase.
They do tend to show the trades that were made and the dates which should be sufficient, but if you’re buying from an individual say on Localbitcoins there might not be a receipt of purchase.
In which case tax authorities account it as you somehow got it for free, with no suggested criminal proceedings in either case or any wrong doing. It just appears they can’t track back the purchase.
One other case this could happen is if you bought in an Initial Coin Offering (ICO) where you send eth or bitcoin and get back whatever other token.
Here there would be a record on the blockchain, but it’s not very clear whether the bureaucrats at the tax agencies have gotten themselves familiar with this blockchain thing.
The etherean claims “the blockchain means s**t, it’s the record of the trade itself that has to be recorded.”
In which case and assuming he’s an upstanding citizen as there appears to be no reason to think otherwise, then all we can say is press F, although we do suspect in a tribunal the judge would exercise some common sense (and hopefully some penalty for the tax authorities lacking it).