How blockchain payment technology is infiltrating core business practices and ways we can maintain tax compliance with jurisdictionswith its use
Cryptocurrency is a decentralized, digital form of currency that is designed to work as an alternative payment medium based on quickly emerging blockchain technology. Although there are over 5,000 different cryptocurrencies in circulation, Bitcoin is the most popular among these digital currencies and has been the fastest growing cryptocurrency considering the volume of trading and price valuation increases. Based on such characteristic’s cryptocurrency is seen as an investment capital asset, more akin to corporate stocks, rather than as a form of legal tender. This perspective shifted when large corporations including Tesla, MasterCard, Home Depot, AT&T, and BNY Mellon made strides to accept Bitcoin as a payment option for their goods and services.
In 2014, the IRS published Notice 2014-21 IRS Virtual Currency Guidance which considered and reviewed the overall status of cryptocurrencies in the United States as of that date. Accordingly, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability. Therefore, once Bitcoin is received as a form of payment, it will be taxed as property for federal tax purposes rather than currency. As such, cryptocurrency, potentially qualifies for tax relief programs in the future while also raining raising the specter of criminal prosecution for those who may have failed to report income and pay the resulting tax or did not report their transactions correctly. IRS efforts to address non-compliance have been ongoing through a variety of means including taxpayer education.
Five years later, in October of 2019, the IRS published additional guidance consisting of Revenue Ruling 2019-24 and an accompanying, frequently asked questions (FAQs), which expands on the initial notice and FAQ. The updated publications consider such situations as a hard fork when legacy cryptocurrency undergoes a protocol change and results in the creation of new cryptocurrency on a new distributed ledger. Another topic of focus is an airdrop which may result when new cryptocurrency is distributed to multiple taxpayers after a cryptocurrency’s ledger is renewed after a protocol change. While these situations seem foreign to many, these events and actions represent the maturing of tax regulations, which are often slow to address technological advances and complexities. The FAQ reconsider with better precision such issues as determining income gain or loss as it reportable to the IRS for these digital currencies.
While the tax implications will continue to unravel, advocates of cryptocurrency have much to cheer. For instance, since Bitcoin can be used internationally, it’s easy to reason that its implementation in business transactions will simplify foreign transactions and hence, be less costly to businesses in terms of exchange rates and fees. Additionally, digital currencies have found …….