The yearly volume of bitcoin transactions in Russia is estimated by the central bank to be over $5 billion. But a recent legislative recommendation escalated a brewing disagreement between the Russian Ministry of Finance and the central bank. Let’s take a deeper look at what the fuss is all about and how this can affect how cryptocurrency is taxed in the USA and across the globe.

Russia’s Latest Crypto Regulation

The finance ministry published legislative recommendations that contrasted with the central bank's call for a blanket ban. This escalated a brewing disagreement over cryptocurrency regulation in Russia.

The proposed legislation to regulate cryptocurrencies in the country includes requirements that investors can no longer stay anonymous and that transactions be limited to a particular value, among many other things. In this context, it must be noted that enabling law enforcement, the ability to track money movements and transactions risks undermining one of the cryptocurrencies' key selling points: its anonymity.

However, to add to the complexity of the matter, a document obtained by Reuters states that the central bank opposes the ministry's plans. Also, it wants an official ban on the creation and distribution of cryptocurrencies.

In order to understand how this legislative recommendation affects the global crypto tax dynamics, let’s take a look at how cryptocurrency is taxed in the USA and in Russia.

How Is Cryptocurrency Taxed In Russia?

In the last month of 2020, the Russian Federation's government introduced Bill No. 1065710-7 to the State Duma, which includes measures that would control the circulation and possession of cryptocurrency and define liability for violations of the bill's laws.

The bill mandates residents, individuals, and legal companies operating in the Russian Federation to report their cryptocurrency holdings and imposes tax liability for illegal failure to submit information or declaring misleading information regarding cryptocurrency transactions. The bill's changes call for cryptocurrencies to be recognised as an "asset" and taxed appropriately.

How Is Cryptocurrency Taxed In The United States?

For tax purposes, the Internal Revenue Service considers cryptocurrencies as property and not currency. You must keep a record of the capital gains or the capital losses and incur the proper cryptocurrency tax rates, just like you would with stocks, bonds, or real estate. These crypto tax rates are determined by the holding period of the assets and your income tax bracket for the financial year.

• Holding your crypto assets for more than a year will lead to long-term capital gains or losses when you sell them. The tax rates on long-term capital gains are often lower than that of short-term tax rates. 

Depending on your income tax bracket, long-term capital gains tax rates vary from 0% to 20%.

• Holding your crypto assets for less than a year will lead to short-term capital gains or losses when you sell them. The tax rates on short-term capital gains are often much higher than that of long-term tax rates. 

Depending on your income tax bracket, short-term capital gains tax rates vary from 10% to 37%.

What Is The Effect Of Russian Crypto Regulation On How Cryptocurrency Is Taxed In The USA?

The Russian government and the central bank have agreed to regulate cryptocurrencies and will treat them as foreign currency rather than a stock. Essentially, the plan states that transactions of $8,000 or more must be registered, and exchanges must be licensed.

With the change in crypto dynamics in Russia, the third-largest crypto mining country, the United States is now attempting to consider what its rules would look like. It is projected that crypto havens would spring up in either primarily island countries throughout the world that simply wants people to switch their bitcoin there to escape taxation. There will be a lot of amendments here from various nations across the globe.

The Bottom Line

These are all significant developments, even if they occur on a global scale, for how U.S. politicians may consider crypto, whether as a security or a currency.

FAQs:

• Is Bitcoin used in Russia?

Russia is the third-largest country in terms of mined cryptocurrencies. But officials have, for a very long time, questioned the crypto market, worrying about its volatility and risk of unlawful activities, and have demanded crypto rules be imposed. The yearly volume of bitcoin transactions in Russia is estimated by the central bank to be over $5 billion.

However, the Bitcoin sales in rubles have remained limited. Russians have purchased an average of 210 BTC each day with rubles. 

• How is cryptocurrency taxed in Russia?

In the last month of 2020, the Russian Federation's government introduced Bill No. 1065710-7 to the State Duma. The bill mandates residents, individuals, and legal companies operating in the Russian Federation to report their cryptocurrency holdings and imposes tax liability for illegal failure to submit information or declaring misleading information regarding cryptocurrency transactions. The bill's changes call for cryptocurrencies to be recognized as an "asset" and taxed appropriately.

• What is the new crypto legislation recommendation in Russia?

The proposed legislation to regulate cryptocurrencies in the country includes requirements that investors can no longer stay anonymous and that transactions be limited to a particular value, among many other things. In this context, it must be noted that enabling law enforcement, the ability to track money movements and transactions risks undermining one of the cryptocurrencies' key selling points: its anonymity.

The retailer has halted product shipments to Russia, while its local partner in Russia has suspended all operations at its 120 retail establishments.  

The retailer’s announcement followed similar announcements by some of the world’s largest consumer brands, such as Pepsi, Coca-Cola, and McDonald’s. While large firms are keen to demonstrate their support for the people of Ukraine, the move by Mothercare could substantially impact its trade. Russia is responsible for around one fifth and one-quarter of its worldwide retail sales, and operations in the country bring in a profit of around £500,000 per month. Following Mothercare’s announcement, shares dropped by 25%. 

On March 8, the United Nations confirmed the deaths of 406 Ukrainian civilians, though the real figure is suspected to be significantly higher. Millions of people have now fled the country, seeking refuge across Europe. According to the BBC, Poland has accepted 1,294,903 refugees, while Hungary has taken 203,222, and Slovakia has 153,303.

“We are acutely aware that our decision last week to purchase a cargo of Russian crude oil to be refined into products like petrol and diesel — despite being made with security of supplies at the forefront of our thinking — was not the right one and we are sorry,” said Shell CEO Ben van Beurden. 

“We will work with aid partners and humanitarian agencies over the coming days and weeks to determine where the monies from this fund are best placed to alleviate the terrible consequences that this war is having on the people of Ukraine.”

Shell said it will now immediately cease all spot purchases of Russian crude oil and that it will not renew contract terms. The oil giant will gradually withdraw all hydrocarbons, including crude, petroleum products, gas, and liquified natural gas. 

Shell has also said it will shut its service stations in Russia, as well as its aviation fuels and lubricants operations. At present, Russian oil constitutes 8% of Shell’s working supplies.

In the 12 days since Russia began its unprovoked invasion of Ukraine, more than 2 million Ukrainians have fled their country. This is according to a tracker from the UN refugee agency. 

When asked whether there would be a European ban on oil imports from Russia, Johnson replied, "There are different dependencies in different countries, and we have to be mindful of that, and you can't simply close down the use of oil and gas overnight even from Russia.”

"We can go fast in the UK...what we need to do is to make sure we are all moving the same direction... and that we accelerate that move and I think that's what you are going to see."

The UK prime minister also said that the government must ensure a substitute supply, though warned that impacts to the UK population can be expected. 

Johnson’s announcement follows on from previous remarks from Europe minister James Cleverly who said that the UK will consider banning Russian oil imports as the US moves to do so.

In a letter to the Ukrainian government, PayPal CEO Dan Shulman wrote, "Under the current circumstances, we are suspending PayPal services in Russia”, adding that the company "stands with the international community in condemning Russia's violent military aggression in Ukraine."

The letter was shared on Twitter by Ukraine’s minister of digital transformation Mykhailo Fedorov who thanked PayPal for its move: “So now it’s official: PayPal shuts down its services in Russia citing Ukraine aggression,” Fedorov tweeted Saturday. “Thank you @PayPal for your supporting!”

While PayPal discounted domestic services in Russia in 2020, this latest move relates to its remaining business in the country, such as send and receive functions and the ability to make international transfers via the payment processor’s Xoom remittances platform.  

PayPal has said that Russian nationals were prevented from opening new accounts earlier this week. 

As offshore trading began in the morning during Asia hours, the Russian ruble traded as low as 119 per dollar from almost 84 per dollar at the previous close. This is according to Factset data. 

On Monday, Russia’s central bank said it had banned its brokers from carrying out sell orders from foreign nationals as it moves to contain the financial market fallout. The bank also announced plans to free 733 billion rubles in local bank reserves in a bid to boost liquidity. 

While Russia’s attack on Ukraine continues, Ukraine currently retains control of its capital city Kyiv and its second-largest city Kharkiv. However, the number of civilians killed in Russia’s invasion is rising day by day. On Sunday, the human rights commission in Ukraine estimated the number of civil victims to stand at 210, including several children. 

Last week, US President Joe Biden responded to Russia’s invasion of Ukraine by announcing a series of sanctions on Russian banks, on the nation’s sovereign debt, and on President Putin and Foreign Minister Sergey Lavrov. 

In a statement, US President Joe Biden said: “I’m going to begin to impose sanctions in response, far beyond the steps we and our Allies and partners implemented in 2014.  And if Russia goes further with this invasion, we stand prepared to go further as — with sanction.”

“Who in the Lord’s name does Putin think gives him the right to declare new so-called countries on territory that belonged to his neighbors?  This is a flagrant violation of international law, and it demands a firm response from the international community.”

The Russia-Ukraine conflict has already sent oil prices above $100 per barrel for the first time since 2014. On Thursday, some prices soared as high as $105 following Russia’s launch of a broad offensive against Ukraine. In the early hours of the morning, explosions were heard near major Ukrainian cities, including the country’s capital, Kyiv. 

Following the attack, Brent crude oil — the global benchmark — jumped by more than 8%, reaching $105.50 early Thursday. Meanwhile, US oil prices climbed to over $99. 

RSM chief economist Joe Brusuelas warns that the war between Russia and Ukraine could ultimately lead to oil prices surging as much as 20% to $110 per barrel. This would cause consumer prices in the US to surge above 10% on an annual basis. This is the highest figure since October 1981. 

"The price of oil has almost doubled since the start of last year and, given current tensions, is poised to move higher. The potential for a broader energy shock to the global and U.S. economies should Russia invade Ukraine has added to a combustible mix of factors that is causing inflation to accelerate in the United States and abroad," said Brusuelas. "That risk carries with it the potential to slow down growth."

Soon after Russian President Vladimir Putin announced he had authorised a “special military operation”, explosions were heard in the Ukrainian capital of Kyiv and the Ukrainian government accused Russia of launching a full-scale invasion. 

In response to Moscow’s actions, the United States and its allies are set to impose “severe sanctions.”

In a statement, US President Joe Biden said: “I’m going to begin to impose sanctions in response, far beyond the steps we and our Allies and partners implemented in 2014.  And if Russia goes further with this invasion, we stand prepared to go further as — with sanction.”

“Who in the Lord’s name does Putin think gives him the right to declare new so-called countries on territory that belonged to his neighbors?  This is a flagrant violation of international law, and it demands a firm response from the international community.”

Following Russia’s invasion, the Euro Stoxx futures and German DAX futures were down over 3.5% in early deals, while FTSE futures were 2% lower. Meanwhile, S&P 500 e-minis dropped 2.3% and Nasdaq futures fell 2.8%. 

On Thursday, the Moscow Exchange said it was suspending all trading. 

Dow Jones Industrial Average futures climbed 60 points or 0.17%. Meanwhile, S&P 500 futures were up 0.2% and Nasdaq 100 futures increased 0.12%. 

The shift follows a tumultuous week for stocks, largely pressured by fears of a Russian attack on Ukraine as well as reports of US inflation reaching its highest level in 40 years. 

For the week, the Dow and the S&P 500 dropped 1% and 1.8% respectively. On Friday, the Dow fell 503.53 points or 1.43%. Meanwhile, the S&P 500 dropped 1.9% and the Nasdaq Composite saw a decline of 2.8%. 

The White House has warned that a war in Ukraine could come any day now and has urged US citizens to leave the country without delay. 

US National Security Adviser Jake Sullivan warned Russian forces were now "in a position to be able to mount a major military action.”

"We obviously cannot predict the future, we don't know exactly what is going to happen, but the risk is now high enough and the threat is now immediate enough that [leaving] is prudent," Sullivan said.

Over the weekend, President Joe Biden attempted to dissuade President Vladimir Putin from attacking Ukraine over a phone call. However, Biden reportedly failed to achieve a breakthrough.

The bank’s proposal is the latest in a global cryptocurrency crackdown. Governments from Asia to the US have expressed concern that highly volatile digital currencies could diminish their control of financial and monetary systems. 

Russia has long been against the use and mining of cryptocurrencies. While the country gave them legal status in 2020, it banned their use as a means of payment and has said they could be used to finance terrorism or to support money laundering. 

In a report on Thursday, Russia’s central bank proposed preventing financial institutions from using cryptocurrencies and said that mechanisms should be put in place to block transactions aimed at buying and selling cryptocurrencies for fiat currencies. This would include crypto exchanges. 

The central bank said it plans to work with regulators in countries where crypto exchanges are registered to collate information about the actions of Russian users. The bank is looking at the steps taken by other countries that have moved to ban crypto, including China, which did so in a series of gradual phases last year.

During a press conference on Wednesday, US Secretary of State Mike Pompeo issued a warning to companies and individuals invested in the construction of the Nord Stream 2 pipeline that “aiding and abetting Russia’s malign influence projects will not be tolerated.”

“Get out now -- or risk the consequences,” he said.

Nord Stream 2 is an $11 billion project that consists of two parallel pipelines running under the Baltic Sea, with a combined length of 1,230 kilometres. When the final few kilometres are laid and the pipeline becomes operational, it will double the rate at which Germany imports natural gas from Russia.

The project is backed predominantly by the Russian state energy firm Gazprom, though it is also co-signed by Uniper, Royal Dutch Shell and Wintershall, among other companies. Earlier this month, the government of Denmark gave its permission for the final 120 kilometres of pipeline to be laid in Danish waters towards Germany.

The US government has repeatedly criticised the project, claiming that it will increase the EU’s dependency on Russian energy, though the German government has repeatedly rebuffed calls to end the project. Peter Beyer, the German government’s transatlantic communicator, commented: “There is reason to suspect that Washington primarily wants to sell its own gas in western Europe.”

The US State Department has revised the 2017 Countering America's Adversaries Through Sanctions Act (CAATSA) to remove language exempting the Nord Stream 2 pipeline from its effects. The government previously passed separate legislation to sanction vessels laying pipes for Nord Stream 2, forcing Swiss-based firm Allseas to back out of the project.

Russia is now trying to use its own vessels to finish the pipeline, but necessarily relies on the assistance of Western companies’ ports and insurance, giving the US leverage to hamper the construction project.

Equinox Russian Opportunities Fund is well-positioned to benefit from some of the new trends in the country and maintain its outstanding performance for the years to come.

Improvement in Corporate Governance

Until recently, Russian state-owned companies were not managed for the benefit of minority shareholders. Some practices are now starting to change. Several oligarchs are beginning to invest directly in the shares of state-controlled companies, rather than benefiting from ownership of the subcontractors billing these companies. This phenomenon has the effect of improving corporate governance, boosting share prices and protecting minority investors. That’s one of the reasons why Gazprom performed so well in 2019. On June 24th of that same year, a new dividend policy was introduced by the Board of Directors. From that point, the dividend distribution is to gradually attain 50% of net profit over the next three years. As a result, Gazprom share price soared from US$ 4.66 to US$ 8.25, an increase of 77% in one year. There is a good chance that other state-owned companies will now follow the same path.

The Race to Artificial Intelligence

During a conference in September 2017, Vladimir Putin declared: “the one who becomes the leader in Artificial Intelligence will be the ruler of the world. It would be strongly undesirable if someone wins a monopolist position”. This intervention highlights the government's awareness of new technologies and, more generally, the digitalisation of the economy. It approved an investment plan (“Digital Economy”) in 2018 with a budget of US$ 25.5 billion. The idea is to accelerate the improvement of legal regulation, digital infrastructure, personal education, information security, digital technology and digital state administration. We are already witnessing real successes in Russia. One example is Yandex, the largest web search engine, which has triple the revenues of Google in Russia.

Until recently, Russian state-owned companies were not managed for the benefit of minority shareholders.

National Projects

Introduced in 2019, the National Projects program constitutes a series of spending priorities in 13 policy areas, including education, health, housing, science, infrastructure and demography. The main objective of the plan is to accelerate economic growth by improving social welfare and modernising Russia's outdated infrastructure with a focus on roads, railways and waterways. The allocated budget represents 2.8% of GDP, which is higher than the estimated military spend (2.7% of GDP). Over the period 2019-2024, the total amount of funding is reported to be approximately US$ 400 billion. These developments are very impressive and should lead to value creation for shareholders in selected companies. The appointment of Mikhail Misuhstin as Prime Minister in January 2020, should bring credibility to these projects. He earned a solid reputation as an effective administrator as head of the tax service, enabling the Russian state to significantly increase the levying of VAT thanks to the adoption of one of the most advanced digital systems in the world.

Russia is changing and evolving at a rapid pace. Exposure to the Russian market offers investors diversification and great growth potential. Equinox Russian Opportunities Fund is well-positioned to profit from these trends.

For more information, contact Equinox on info@equinoxmgt.com