The new legislation will affect investors and companies that profit from cryptocurrency products and services based on the details of their individual services. However, there are a few general trends that we can follow to get a better sense of legislation at a macrocosmic level.
The general rule is that Canada, the United States, and European countries are increasing related regulations. These regulations are focused primarily on anti-money laundering efforts, identity security, and how each nation will tax income from cryptocurrency.
This article looks at regulations in Canada, the US, and Bermuda. Bermuda is considered because it is still primarily a tax haven for digital currency transactions. In contrast, Canada and the US have moved to treat digital currencies much like traditional securities and taxable income.
Canadian regulations now extend to Canadian crypto exchanges because they are digital token traders. That means that the guidelines for crypto exchanges from the Canadian Securities Administrators (CSA) work much like the current guidelines for traditional securities. 2021 marks the year that Canadian exchanges must register with the Investment Industry Regulatory Organization of Canada (IIROC).
The new regulations do not mean that digital currencies are officially the same asset as securities. However, the IIROC will now treat digital assets in much the same way. These regulations apply to all for-profit exchanges with operations in Canada, including those platforms that facilitate international trades. This means that Canadian exchanges, and international exchanges, such as Binance, will need to comply with the new legislation.
Most cryptocurrency businesses are simply required to register with the Financial Transactions and Report Analysis Centre of Canada (FINTRAC). FINTRAC is a government-run agency, which tracks and polices money laundering and terrorist financing.
This means that Canadians and Canadian-based companies will be taxed on profits earned from cryptocurrencies. For investors, this will most likely be in the form of capital gains. Business income will be taxed based on a valuation of the cryptocurrencies in CAD.
The US has a much less coherent treatment of blockchain-based technology and cryptocurrencies. This is because the regulatory discussion exists at the agency level, which includes: the Department of Treasury, Securities and Exchange Commission (SEC), Federal Trade Commission (FTC), Internal Revenue Service (IRS) and Financial Crimes Enforcement Network (FinCEN).
Each agency holds a different definition of cryptocurrency and how it is regulated. And, although FinCEN does not consider cryptocurrency legal tender, it does treat crypto exchanges as money transmitters.
The IRS treats cryptocurrencies as property and has issued tax guidance accordingly. These are similar to the Canadian Revenue Agency’s and focus primarily on capital gains.
Currently, there are no federal government constitutional regulations on blockchain technology. As such, individual states are free to introduce their own rules and regulations. As of 2019, 32 states introduced legislation acknowledging the legal use of Bitcoin and blockchain along with taxation consequences.
Bermuda is the exception to this trend. It has maintained a position that promotes the use of digital assets and the development of fintech. Generally speaking, issuing, selling or redeeming cryptocurrencies is regulated under the Digital Asset Business Act (DABA), as this constitutes a business.
DABA comprises a regulatory framework for fintech businesses that operate from Bermuda. However, the DABA does not initial coin (ICOs) and security token offerings. These are regulated under a separate regime.
Currently, there is no income tax, capital gains, withholding, or other taxes in Bermuda on digital assets or for any cryptocurrency transactions.
However, mining is exempted from the jurisdiction of the DABA and remains an unregulated activity. Bermuda’s high energy costs act as an economic deterrent for establishing for-profit mining. The majority of cryptocurrency mining takes place in areas with low energy costs, such as China.
Investors and Regulations
For cryptocurrency investors, this means that legislations around the world are fast evolving. Each investor must keep up with their local regulations. There are still tax havens, such as Bermuda, that will accommodate many crypto transactions.
However, if your transactions take place in North America or Europe, users can expect that exchanges will increasingly require more personal information to register.
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