Carbon Credits Taxable
One of the most pressing questions that arises as carbon credits become more widely traded is whether they are taxable. The answer is not as straightforward as “yes” or “no.” It depends on the country in which they are purchased and the status of the carbon credit project. It also depends on whether they are purchased in a compliance or voluntary market.
In a compliance market, the purchase of carbon.credit offsets is a way to meet an emission reduction requirement. In a voluntary market, there is no obligation to reduce emissions and the purchase of carbon offsets is simply a way for companies to achieve environmental, social, and governance (ESG) objectives. Either way, the purchase of carbon credits can be a significant expense for a business.
As with other property, the tax treatment of a carbon credit depends on its classification as real or personal property. The classification is important because it determines how the carbon credit will be treated for tax purposes and what planning opportunities are available.
Are Carbon Credits Taxable?
If a carbon credit is considered an interest in real property, it will be taxed at the same rate as other real estate. This could be a significant benefit for projects that need to sell the carbon credits to generate cash flow. If the carbon credit is considered personal property, it may be taxed at a lower rate than other property income. This may be a benefit for companies that are investing in carbon capture projects.
Regardless of the classification, it is important to consider chain of title and ownership. A good rule of thumb is that a carbon credit must represent at least one metric ton of additional, permanent, and unclaimed carbon emission reduction or sequestration. Additionally, it should not be derived from activities that contribute to environmental harms or social injustices.
In some cases, a company’s sale of a carbon credit will be treated as a capital disposal and subject to capital gains tax (CGT). This is because the company owns an intangible asset that will not be available for use again. The sale of a carbon credit can also be taxed as business income, if the company is using it to produce goods and services.
The US government offers a variety of incentives to encourage investment in carbon capture and storage. For example, Section 45Q of the Internal Revenue Code provides a tax credit for the capture, utilization, and storage of carbon dioxide and carbon oxide. This incentive has been expanded a number of times over the years to make it more attractive to investors. A tax professional can help businesses determine the best way to structure their investments in carbon sequestration projects and obtain the maximum benefit from the available incentives.
