In recent years, the cryptocurrency landscape in Pakistan has sparked both curiosity and worry among investors and regulators alike. Amidst speculations of a potential total ban on cryptocurrencies due to significant scams and illicit activities, the government is exploring alternative solutions to manage this burgeoning market. One such solution being considered is the introduction of regulations and taxation on crypto transactions, with a proposed 15% tax on profits from crypto trading. As the country witnessed a staggering $20 billion in crypto trading with a profit of $650 million in 2021, the need for a regulatory framework to govern these transactions has become increasingly evident.
The Crypto Landscape in Pakistan
With over 9 million individuals in Pakistan reportedly owning cryptocurrency, representing approximately 4.1% of the population, the interest in digital assets is on the rise. The potential introduction of government regulations is expected to further fuel this interest as investors seek clarity and legitimacy in their crypto endeavors. However, the lack of clear regulations has left many uncertain about the legality and taxation of their crypto investments.
Taxation on Crypto Profits: Proposed Regulations
At present, the taxation of cryptocurrency profits in Pakistan remains a gray area. While crypto trading is not explicitly illegal, there are no existing regulations or taxes specifically levied on crypto assets. However, under the proposed law, crypto gains would be subject to taxation under Section 37A of the Income Tax Ordinance, 2001, defining them as “securities.” Additionally, converting crypto into cash and depositing it into Foreign Exchange accounts or Roshan Digital Accounts would also incur taxation.
Proposed Crypto Tax Rates
Despite the absence of current taxation on holding or trading crypto assets in Pakistan, the proposed law suggests a tax rate of 15% on gains from the sale of cryptocurrencies. Furthermore, a 5% tax would be applied on encashment and deposits in Foreign Exchange accounts, and a 10% tax on encashing crypto assets and keeping them in Roshan Digital accounts. These proposed tax rates aim to generate revenue for the government while providing a framework for regulating crypto transactions in the country.
Calculating Tax on Cryptocurrency Profits
In the event that the proposed law is enacted, taxes on cryptocurrency profits would be calculated based on two primary methods: The First-In, First-Out (FIFO) method or the Average Cost Basis (ACB) method. Under the FIFO method, the oldest acquired coins are sold first, with taxes levied on the difference between the selling price of the coin and the cost price of the acquired coins. Conversely, the ACB method calculates the average cost of all acquired coins, with taxes applied similarly.
Example Calculation:
Consider purchasing 2 BTC for PKR 20,000 in 2020 and 4 BTC for PKR 60,000 in 2021, then selling 4 BTC in 2022 for PKR 100,000:
FIFO Method: Taxes are levied on PKR 50,000 profit.
ACB Method: Taxes are levied on PKR 46,666 profit.
Summing It Up
While cryptocurrency transactions remain tax-free in Pakistan at present, proposed regulations could introduce taxation on crypto profits, necessitating a thorough understanding of tax implications for investors. As the government moves towards establishing a regulatory framework, it is essential for crypto traders to stay informed and compliant with country-evolving taxation policies. Moreover, seeking professional advice from tax experts can help you ensure compliance with the law.
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