What Might the Future Hold for Cryptocurrency Taxation?

Alon Muroch, CEO, Blox

Any given bitcoin is, in theory, equivalent to any other bitcoin, just as any tranche of ether has the same value as any given slice of the same size. Whenever or however a cryptocurrency was mined or minted, and wherever its holder might reside, all instances of a given currency should have the same value. Unfortunately, practice rarely lives up to theory’s promises. In the case of bitcoin, the government may deem certain coins tainted if they ever passed through suspect accounts. But perhaps the biggest driver of effective nonfungibility is tax. Every country seems to have a different set of tax rules and regulations for cryptocurrency; an American, an Englishman, and a Frenchwoman might all hold the same amount of bitcoin, but they would have very different experiences of value. And, with further tax rulings laws expected around the world, it’s unlikely that cryptocurrency taxes will be stable or simple anytime soon.

The French government recently announced that it would only tax cryptocurrency involved in crypto-to-fiat transactions. Though the French don’t have quite so light a tax burden as the Portuguese digital asset holders do — Portugal doesn’t tax crypto at all — the newly promulgated rules are far less onerous than those in place in many countries, including the United States. 

The situation in the United States remains complicated. Although the United States House of Representatives has introduced various “Safe Harbor” and “Virtual Value” rules, none has yet made it through legislative gridlock and into the nation’s law books. At present, most tax professionals interpret the Internal Revenue Service’s Notice 2014-21 such that any cryptocurrency transaction, including crypto-to-crypto swaps, incurs a tax liability. Such a ruling makes it near-impossible for a layperson to handle their own cryptocurrency taxes: To adhere to the IRS standards, they must keep track of the exact value of every portion of their holdings at the moment they acquired it, and whenever they exchanged any portion of it for another cryptocurrency or for fiat. The complexity of the accounting required alone would make cryptocurrency far less appealing than it might otherwise be, but the effects of volatility cause even more problems. Because each transaction must be taxed, it’s altogether possible that a taxpayer would pay high rates on an ill-timed crypto-to-crypto trade, watch the second crypto’s value plummet, and then discover, come tax time, that their significant loss was aggravated by their Notice 2014-21 observance. 

What can the French and American models for cryptocurrency taxation teach us? Simply that a good tax scheme must only tax a person who actually enjoys a benefit; crypto-to-crypto taxation imposes a cost on a virtual benefit that may result in a real-world loss. The labor burden that crypto-to-crypto taxation incurs is also immense; it forces small-time holders to invest in accounting services if they don’t want to flout the law. The UK and, especially, the US should strive to create tax rules that do not penalize cryptocurrency holders. 

New cryptocurrency projects are still going live; older projects still receive updates and forks. Though Bitcoin is more than a decade old, cryptocurrency remains a young technology, and if the early days of the internet taught us anything, it’s that it takes years for governments to adequately respond to innovations. Major changes, however, can inspire regulators and tax authorities to act more quickly. One such spur to innovation is Facebook’s announced but undated Libra stablecoin. Libra has faced criticism the world over, and Mark Zuckerberg himself doesn’t know when it might launch, but anyone concerned with cryptocurrency should keep a close eye on Facebook. If and when Libra launches, much may change in cryptocurrency accounting.

What does the future hold? I don’t foresee fundamental changes to any country’s regulatory regime in the next several months, though I hope and expect that incremental change and deliberate clarifications will gradually bring greater unity and coherence to the cryptocurrency accounting. The digital assets world has a habit of surprising its observers, however, and it’s entirely possible that an unexpected event, like the Libra launch, could change the scenario. Wherever you live and whatever you hold, the rules of accounting will be evolving for years to come.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.