Avantisteam Claims: Crypto-Taxation: Imperfect, Imposing, Imperative? - AMBCryp... - Jonathan Cartu CPA Accounting Firm - Tax Accountants
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Avantisteam Claims: Crypto-Taxation: Imperfect, Imposing, Imperative? – AMBCryp…

Crypto-Taxation: Imperfect, Imposing, Imperative? - AMBCryp...

Avantisteam Claims: Crypto-Taxation: Imperfect, Imposing, Imperative? – AMBCryp…


Cryptocurrencies are any digital currency with no central issuing, regulating authority, one that exists only on a decentralized ledger called blockchain. Sounds clear enough, right? Well, not quite, if you consider how differently they are treated by tax agencies around the world.

Nothing is better evidence of the global crypto-confusion than an examination of how members of the J5, the Joint Chiefs of Global Tax Enforcement, view cryptocurrencies. On one hand, in the United States and Australia, cryptocurrencies are classified as property and incur capital gains taxes. On the other hand, the Netherlands considers cryptocurrencies as goods, while countries such as the U.K and Germany rule on it on a case-by-case basis.

Consider this – The member states of an international task force that aims to combat the growing threat to tax administrations posed by cryptocurrencies and cybercrime are themselves undecided on how to treat cryptocurrencies. The inability of the J5 to do its job was articulated by Wendy Walker, Solutions Principal at Sovos Compliance, who told AMBCrypto that “the lack of coherent tax policy from J5 countries is unsurprising, considering the level of uncertainty investors are facing in the U.S.”

In fact, such examples are emblematic of the fact that “with occasional exceptions, such as tax treaties, there is rarely an attempt made to harmonize taxation throughout the world,” according to Practus LLP’s Robert Elwood.

Cryptocurrency: More of an investment asset, than a currency

It is now easy to forget that in the early days, Bitcoin was considered by many to be a currency and a medium of exchange until processing speeds and scalability proved otherwise. However, it continues to impress many as an investment asset.

The United States’ IRS dictating that cryptocurrency was a form of ‘property’ way back in 2014 was perhaps the best recognition of Bitcoin and cryptocurrencies’ evolution.

Bitcoin’s rise with respect to Futures and Options trade has been significant, something evidenced by the astronomical rise in open interest and volume and the fact that Binance launched its own dedicated Futures platform.

ICE’s Bakkt was also launched in September after a slow start, with Bakkt’s BTC contracts registering high daily volumes as well. Such institutional involvement has contributed to crypto’s financial utility, with Bitcoin’s credentials in the derivatives industry undeniably successful.

The aforementioned case makes it extremely difficult for Bitcoin to be treated any different than the likes of stocks, bonds, ETFs and other commodities.

Too late to the party?

Another possible reason behind governments being slow with crypto-tax regulations is that they didn’t expect this emerging asset class to last as long as it has, or be as popular as it is, which is why tax authorities across the world were perhaps, caught off-guard.

Another reason for the same was highlighted by Sovos’ Wendy Walker who said,

“They [IRS, other global tax agencies] aren’t technologically advanced, and they often rely on old-fashioned mail, which does not correlate well with digital assets.”

However, recognition doesn’t necessarily equal acceptance as many central banks and government representatives around the world continue to claim that cryptocurrencies are a significant threat to the government’s financial hegemony.

How then did countries deal with it? While some just banned cryptocurrencies altogether, others began wielding an instrument more powerful than any – Taxes. Think about it – cryptocurrencies are meant to assert an individual’s control over his/her assets, without the participation of any intermediary or government. Alas, governments are now using taxation policies to re-impose and re-assert the financial control they were expected to lose with the dawn of cryptocurrencies.

Ryan Losi, Public Accountant and President of PIASCIK accounting firm, said it best when he told CNBC,

“For Americans, there is no free lunch. If you’re richer tomorrow than you were today, it is likely you have some tax burden associated with that.”

A question of freedom

The case of San Francisco-based Coinbase is a case in point. Exchanges and entities providing cryptocurrency transactions services are not specifically mandated to provide tax reports to users, but the likes of Coinbase had to provide a “cost basis for taxes” report to users after the IRS ordered it to turn over the data of over 13,000 customers.

Most arguments against the taxation of cryptocurrencies come from two parties – Libertarians and crypto-anarchists. While the latter oppose crypto-taxation on the basis of the argument that it re-imposes state control, Libertarians argue that taxation should be a voluntary exchange and not coercion.

However, it can also be argued that both Libertarians and crypto-anarchists are overstating how bad crypto-taxation is. Just because traded and invested crypto-assets are being taxed doesn’t necessarily mean that the government is attempting to clamp down on individual liberty.

Taxation is good?

Crypto-taxation could be an expression of the government’s recognition of crypto-assets as something legitimate, however, it defines its nature and status. Crypto-taxation, one can argue, highlights not just the state’s acceptance of this emerging class, but also underlines its confidence in the long-term stability and sustainability of such assets.

The fact that governments and regulators around the world continue to caution against crypto-assets shouldn’t take anything away from the fact that the asset class has come a long way since the days of the Silk Road. In the larger scheme of things, taxation may, in fact, be imperative. This was the belief of John Carr, CCO at Sophisticated Investor, when he spoke to AMBCrypto,

  “…if the asset wants to achieve mass adoption and legitimacy as an asset class, taxation is imperative. By adhering to regulators, cryptocurrency gains credence in the eyes of more investors, rather than simply being regarded as something tantamount to a passing trend.”

There is truth to Carr’s assessment. For long, cryptocurrencies were associated with darknet, a tool for criminals and terrorists in the dark underbelly of the Internet. While this sentiment hasn’t worn off completely, no longer are cryptocurrencies ‘Magical Internet Money;’ it is a legitimate asset class that has everyone from the Federal Reserve Chair to Facebook’s Mark Zuckerberg talking.

Carr’s sentiments were shared by Robert Elwood, CEO and Partner at Practus LLP. Calling the idea of anything being truly borderless or free from governmental oversight naïve, he told AMBCrypto,

“Simply having a philosophy of wanting to be free of government oversight is a valid concept, but that alone does not relieve one from complying with generally applicable laws.”

He …

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