Tax Incentives & Deductions in Emerging Industries: Crypto, Green Energy & Startups

Emerging industries often receive special tax treatment to help the government support their growth.  Cryptos and green energy aren’t emerging industries; they have been around for a while now, but changing technology and public attitudes may require governments to adjust their policies to accommodate them.

In this article, we’ll discuss tax incentives and policies targeting cryptocurrencies, green energy, and startups that investors and business owners should be aware of.

Why Tax Incentives in Emerging Industries Matter

Governments around the world use tax policies to incentivize certain behavior and to ease transitions between policy approaches.  In this case, the tax incentives support decarbonization, digital transformation, and economic growth.  If crypto trading and investing can be used to achieve these broad goals, it could be helped via a policy of tax refunds.

The incentives also work on the business side, as they lower the initial cost of doing business, help investors purchase the necessary technology, or enable them to invest their profits in areas such as homeownership.

Crypto Tax Treatment, Incentives & Pitfalls

 Digital assets aren’t treated as money when it comes to taxation.  They are taxed as general income or capital gains, depending on how long an investor has held an asset.  For instance, when crypto exchanges in Canada charge users a fee to keep the exchange running, tokens offered as rewards for this are taxed as ordinary income.  The profit from selling a token at a price higher than you paid is taxed as capital gains.

 Potential Deductions

There are a few potential tax deductions the tax authorities could offer to help crypto investors.  These are:

• Business expense deductions that will include hosting, infrastructure, legal, and auditing costs, as well as security expenses.
• Research and development expenses could be deducted as they are in many other industries.  This includes new protocols, smart contract systems, and improvements in cryptography.
• According to experts from CryptoManiaks, many cities and towns are introducing economic incentive zones to attract crypto companies. These often offer tax holidays, reduced property taxes, and favorable regulatory regimes.

Potential Pitfalls

Such tax policies often face pitfalls that need to be addressed by both the investors and the tax authorities.  These include:

• Crypto trading involves frequent taxable events, meaning every swipe, trade, and fund allocation is reported and taxed.  This makes it difficult to set up and maintain.
• Wash sale rules are somewhat vague.  Allowable losses need to be defined, and this isn’t easy to do across borders and jurisdictions.
• Global standards like the OECD’s Crypto-Asset Reporting Framework (CARF) are labor-intensive because there are many events to report.

Green Energy: Credits & Deductions That Drive Project Economies

Some countries are introducing a tax credit for homeowners or renters who use clean energy in their homes.  This comes in the form of a tax credit that usually goes up to 30 percent of the energy costs.  In the US, there’s no cap on how much a taxpayer can get back, but there are limits in terms of how old their green energy system can be.

Energy Efficient Home Upgrades

Some jurisdictions also provide a tax deduction for energy-efficient home improvements.  These include windows, insulation, and heating systems.  These do come with caps on how much a household can spend on these upgrades per year.

Investment Tax Credit

There’s a tax credit for the investment in green energy products.  These include utility-scale solar, wind, and other renewable energy sources.  Energy storage also becomes an increasingly important part of the green energy system.

Project Considerations

There are limits to how these tax deductions could be used.  For instance, it may be difficult to determine who’s eligible for the tax deduction due to the complex legal language governing it.  The goal of the effort is, in equal part, to help homeowners introduce green energy projects and the companies that provide and install these services, and that’s where the mix-ups often happen.

There’s also a growing issue of “double dipping,” where homeowners use more than one tax deduction, which some find unfair.

Startups: R&D, Payroll Offsets & Investor Reliefs

Startups working in the green field are also offered tax relief to promote and support their services.  These come in three main forms.

Research and Development 

The companies have a right to a deduction for expenses incurred for research and development.  Some tax systems now allow immediate deduction of R&D expenditures (rather than capitalizing and amortizing).  The main benefit of this approach is that it reduces the cash flow expenses teams are dealing with.  In some cases, companies can use this tax deduction to lower their payroll taxes, which is the main tax burden for most businesses.

Investor-Oriented Relief

Some jurisdictions have a tax-deductible scheme made to help investors directly.  The goal is for investors to provide equity capital early on.  For instance, in the UK, investors can get up to 50% income tax relief on investments of up to £200,000, plus a capital gains tax exemption if held for 3+ years.  Alternatively, investors can invest up to £1 million (or £2 million in knowledge-intensive companies), receive 30 % income tax relief, and benefit from CGT deferral or exemption.

Pitfalls

The tax deductions offered to businesses in this manner require them to collect and provide a huge amount of paperwork.  This causes delays and is very expensive and time-consuming for businesses.  The documents include technical project memos, time-and-effort logs, vendor invoices, and versioning records.

It’s important how a business is structured when trying to obtain this deduction, and many investors and business owners aren’t aware of that when creating their business in the first place.

Many tax deductions offered to investors have specific time frames during which they are in effect, and if investors miss them, they won’t be eligible.  This puts an additional strain on small businesses that don’t have a team to deal with these issues.

Actionable Checklist & Questions for Your Tax Advisor

Those who want to use these deductions should consult with their advisor and have a list of questions and actions ready for such an effort:

Checklist 

• Keep track of invoices, timesheets, and contractor breakdowns
• Create a technical memo about your research and development efforts.
• Track crypto events and log timestamp, transaction type, and cost basis
• Monitor sunset rules and phase-outs

Questions to ask your tax advisor

• Does my work qualify as research and development?
• Can I use credits against payroll taxes?
• Are my crypto trades taxable?
• What is the risk of audit in this incentive area?
• If credits are transferable, how should monetization work?

To Sum Up

Tax incentives often target certain industries and practices as a way of supporting them.  Investors and everyone else who could benefit from them should try to educate themselves about the options they have available.

Crypto investments, green energy, and startups are all covered by such incentives.  However, the regulation is complex in all of those areas, and it helps to use the services of a tax advisor when applying.

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