Bitcoin Halving and Crypto Taxation: Supply Dynamics and Regulatory Challenges

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Cryptocurrency enthusiasts and investors around the world patiently wait for the BitCoin (“BTC”) halving to occur approximately every four years, the event in which the reward for mining BTC is cut in half. The halving prolongs the way to the full BTC supply being minted and in circulation knowing that the ultimate BTC supply is fixed.  

This is one of the key points that differentiates BTC from normal currencies (aka fiat currency, as crypto enthusiasts call it). The fiat currency supply is a sovereign function that takes into consideration several macro economic factors using various tools like, for example, hiking or reducing interest rates. 

The BTC supply on the other side is fixed at 21 million BTCs, which has been pre-programmed in the BTC code by the mysterious Satoshi Nakamoto. With only less than 2 million BTCs can still be minted, the halving is expected to create a supply shock in the crypto markets.  

On the demand side, the approval of the BTC exchange-traded fund (“ETFs”) in many countries will probably bring more investors to the volatile BTC market. Many people are also pushing for wider crypto adoption and we have seen hundreds of blockchain projects with trends in gaming, DeFi (decentralized finance) AI and tokenization of real world assets. 

These shifts in the BTC supply and demand dynamics are expected to pave the way for a massive bull run in the crypto markets in the twelve to eighteen months following the BTC halving, according to many crypto analysts. Their argument is clear - the past BTC halving events in 2012, 2016 and 2020 triggered bull runs each and every time with almost identical scenarios and there is no reason to expect a different outcome this halving. Time will tell if they are right. 

Nonetheless, it is no secret that many retail and institutional investors are making huge gains (and losses) trading and investing in crypto and there is a high degree of uncertainty on how these will be taxed. Crypto is a relatively new class of assets and only a few countries have introduced guidance on the taxation of crypto gains or losses.  

We have seen different approaches from tax regulators across the world, ranging from no specific crypto clauses in the tax legislation to complex crypto specific guidelines that determine the taxability of crypto gains/ losses based on a number of different factors that delve into the core of the crypto industry. For example, Singapore e-tax guide provides for different tax implications depending on the nature of the token and whether it is a payment, a utility or a security token. The e-tax guide also discusses the taxation of Initial Coin Offerings (“ICOs”), mining activities, airdrops and crypto hard-forks.  

There is also the OECD’s Crypto Asset Tax Reporting Framework that is expected to have a major tax impact on a number of players in the crypto industry including custodians and intermediaries.  

In the Middle East, and whilst specific crypto tax guidelines are very limited, the UAE established the first Virtual Assets independent regulator Virtual (Assets Regulations Authority - VARA) to help investors and innovators operating in the industry. VARA issued a comprehensive framework built on the principles of economic sustainability and cross-border financial security. This takes Dubai one step closer to position itself as a regional and international hub for virtual assets and related services, investments and businesses.  

With all the new blockchain based projects and the constant changes in tax to keep up, it will be interesting to see how tax regulators work on both international and domestic levels and how tax technology will change to cope with the fast moving crypto industry. The race towards attracting crypto investments and businesses has started years ago and busy days await regulators with the main challenge being finding the balance between regulating the industry whilst allowing space for innovation and for businesses to grow. 

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