Biden's tax increase triggers turmoil in the cryptocurrency market; what about the tax policies of other countries?
The United States, South Korea, Japan, and others have high capital gains taxes, while China currently does not.This article was published in Wu's Blockchain, author: Uncle Tan.
U.S. Cryptocurrency Tax Situation
On April 22, a piece of news triggered a plunge in the U.S. stock and cryptocurrency markets. President Biden proposed a tax increase for the wealthy, raising the capital gains tax rate to a maximum of 39.6%, nearly double the current highest rate. This proposal caused the S&P 500 index to drop by 0.7%, the Nasdaq Composite to fall by 0.6%, and the prices of cryptocurrencies like Bitcoin also plummeted.
For U.S. taxpayers, capital gains tax is an important tax that must be paid when realizing investment gains. For example, if a person turns $1,000 into $10,000 through investment, then $9,000 of that is considered capital gains. If the asset is held for more than a year, it is classified as long-term capital gains; otherwise, it is short-term capital gains, which are taxable. The specific amount of capital gains tax also relates to the taxpayer's actual income. Taking long-term capital gains tax for assets held over a year as an example:
For households with an average income of less than $40,000, the tax rate is 0%, and no capital gains tax is owed;
For households with an average income above $40,000 but less than $496,000 (or $441,000 for singles), the tax rate is 15%, requiring $1,350 in capital gains tax;
For households and individuals with income above these levels, the capital gains tax is 20%, requiring $1,800 in capital gains tax.
If the taxpayer holds the asset for less than a year, the tax rate is higher, ranging from 0% to 37% depending on the taxpayer's income.
Biden's tax increase would raise the tax rate for households earning over $1 million to 39.6%, nearly doubling the previous maximum of 20%. However, the tax increase proposal still needs to be submitted to Congress for approval.
In the cryptocurrency sector, according to Forbes, if you sell cryptocurrency held for less than 12 months, profits will be taxed at rates ranging from 10% to 37%; if held for more than 12 months, profits will be taxed at 0%, 15%, or 20%. Biden's proposal essentially raises the 20% rate to 39.6%. The IRS has required individuals to disclose cryptocurrency-related gains on their tax returns since 2019.
During a Senate Finance Committee hearing on April 13, U.S. Senator Rob Portman stated that legislation is being developed to clearly define the types of taxes on cryptocurrencies and the information reporting rules that traders must follow, indicating that the U.S. loses up to $1 trillion annually in unpaid taxes due to cryptocurrencies.
Although the bill has not yet passed and only 540,000 people would be affected by this change, the tax increase primarily symbolizes a move against the wealthy, investors, and the cryptocurrency industry, indicating that the Democratic Party will likely release stricter measures in the future. Coupled with rumors on Twitter that Yellen plans to impose an additional 80% tax on cryptocurrency profits, it reflects market fears regarding regulation.
Capital Gains Tax Situation in Other Countries
Japan. In Japan, profits from investing in cryptocurrencies are classified as "other income," and the capital gains tax on "other income" can be as high as 55%. Although 55% is only a theoretical maximum rate and may not be reached in practice, it is still significantly higher than the flat 20% tax rate on stock investments, leading to a lack of motivation for taxpayers to voluntarily report their cryptocurrency assets.
South Korea. Starting in 2022, individuals who earn more than 2.5 million won (approximately $2,260) from cryptocurrency investments must pay a 20% capital gains tax on that portion. For instance, if a South Korean taxpayer earns 10 million won from cryptocurrency investments, they would owe (10 million - 2.5 million) * 20% = 1.5 million won in capital gains tax.
Capital Gains Tax Situation in China
For China, the capital market is still a nascent concept, and unlike most countries in the world, China does not have a capital gains tax. A person does not have to pay taxes on profits made from buying low and selling high in the stock market, which contributes to the unusually active trading in China's A-shares.
In China, the closest equivalent to foreign capital gains tax is the real estate appreciation tax. Over the past twenty years, real estate prices in China have surged, so when selling real estate, a tax of over 5% must be paid on the appreciation portion. If the property is commercial, the appreciation tax is even higher. Since most of the wealth of Chinese people is concentrated in real estate, similar to how most American wealth is concentrated in stocks, the real estate appreciation tax is the largest tax that taxpayers face on asset appreciation.
Previously, Wu's Blockchain author Huo Xiaolu also pointed out that taxes in China are denominated in RMB. Most virtual currencies are priced in USD. If one needs to pay taxes, they must convert the virtual currency to the corresponding USD and then convert it to RMB. This process involves both the pricing of virtual currencies and the indirect exchange with fiat currency, both of which are prohibited by the 94 regulations. Therefore, under the current policy context, taxation is merely a hypothetical issue; if one truly reports it, the tax authorities may face headaches.
Benjamin Franklin, one of the Founding Fathers of the United States, once said that in this world, only death and taxes are unavoidable. Thus, in the U.S., taxation has become an extremely complex matter, with most people needing to hire professionals to handle it. As a means to adjust the wealth gap and increase social welfare, most societies utilize taxation. It is foreseeable that China's tax system will gradually improve, and in terms of capital gains, it is likely to implement taxes similar to those in the U.S., Japan, or South Korea. However, since the cryptocurrency market is still relatively small compared to other sectors, it can be imagined that the introduction of capital gains tax on cryptocurrencies will take a long time to materialize.
