The taxation of cryptocurrency assets in Pakistan plays an important role in the broader framework of legalizing digital currencies within the country.

The preceding articles in this series have methodically built a foundation by defining cryptocurrency, outlining the legal and regulatory framework, specifying the oversight body and licensing requirements, ensuring consumer protection, and implementing an AML-CFT framework.

The focus now shifts to the comprehensive taxation of cryptocurrency, detailing how the state can generate revenue while maintaining compliance with international standards.

Pakistan’s roadmap to crypto legalization—IV

The classification of cryptocurrency as either a commodity, or security, or currency significantly impacts its tax treatment. The nature of crypto assets as both an investment vehicle and a medium of exchange demands distinct tax approaches. The capital gains tax applies when digital assets are acquired and disposed of for profit, while transactions for goods and services trigger VAT implications.

The mining of cryptocurrencies presents a unique tax liability, requiring the recognition of generated assets as taxable income. The appropriate categorization of mining rewards and staking income influences the calculation of taxable gains.

The mechanics of cryptocurrencies rely on Distributed Ledger Technology (DLT), with blockchain serving as the most recognized form. Unlike permissioned systems that limit access, cryptocurrencies operate on permissionless blockchains, ensuring public accessibility but demanding robust mechanisms to prevent double-spending.

Pakistan’s roadmap to crypto legalization–III

Moreover, cryptographic encryption secures transactions, with private keys allowing users to authenticate transactions without revealing sensitive data.

Similarly, validation methods like proof-of-work and proof-of-stake play a vital role in maintaining the integrity of crypto transactions, influencing tax treatment by determining whether crypto rewards are categorized as income or capital gains. Stablecoins, which maintain value through asset backing or algorithmic control, differ in tax implications due to their minimized volatility.

The taxation of cryptocurrency holdings follows conventional tax principles, where unrealized gains remain........

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