A story of vampires (iv)

A frequent question that we hear at CIAT: What are some of the new tax administration challenges? And often, the asker refers to the cryptocurrencies. The last time, the person who asked mentioned that he was aware of the difficulties they represented in the control field, but he also mentioned that their trading volumes did not appear to be significant and that their use in the formal sector of the economy would be difficult, inconvenient or, depending on the jurisdiction, possibly illegal.

Since the publication, on this blog, of a couple of articles related to bitcoin (those vampire stories[1]) almost five years have passed, and since then, not only the total number of cryptocurrencies available has grown by orders of magnitude, but the market value of bitcoin is almost 10 times what it was at the time, with major ups and downs, necessarily implying that those who, as a result of their thoughtful economic analysis or simple and plain speculation, have traded with bitcoin and gained or lost significant amounts of money. Last December, the creator of litecoin, cryptocurrency created in 2011, claimed[2] to have sold all those coins in his possession at a time when they had won an increase of 7000% of its value.

Surely such outcomes would have tax implications that may not be very clear for a tax administration depending on the treatment to be given, i.e. the equivalent to transactions with foreign currency, the equivalent of an intangible asset, an investment in papers or to a simple barter. We can add to this, difficulties in obtaining information from third parties if these are not reported by the taxpayer, to identify the transaction or give clues about it due to pseudo-anonymous character that they can have.

And these challenges could keep increasing. For example, supported in blockchain technology, some companies, particularly startups, have used a mechanism called “Initial Coins Offering- ICO[3]. This is a new mechanism used by some companies (startups) to search for significant financial contributions, for example, to develop products or services, in which they sell tokens[4] of companies, whose transaction history will be recorded immutably in the blockchain.

The amount of these ICO passed, according to the website coindesk[5] , from 5,000 million in 343 operations in 2017 to 7,000 million so far in 2018 with 271 operations.

These tokens will surely be marketed using the same platform, but also in several cases they may be used in the future to “pay” for the goods or services developed by the company and therefore could be treated as advance payments for services. Depending on who you ask, they may be treated as loans, advance sales of goods or services, capital contributions from known or unknown partners, as a cryptocurrency, or property; or indeed, for some, as dark operations that should be kept under the carpet.

Several of these ICO have been able to raise tens of millions of dollars in very rapid periods, all without the intervention of a regulator or qualified intermediaries. Surely, residents from more than one jurisdiction have participated. Some of these transactions, and the commissions for the “miners”[6] processing the transaction, are paid with encrypted coins. Some of these operations are supported with smart sales contracts, for example, based on Ethereum or Dapps[7] . These contracts are very different from those the administration is used to, and with the possibility of huge variations. This is something that can be a radical change to the traditional forms of financing or just a gigantic speculative bubble that sooner or later will explode.

Of course the participant, as a taxpayer, has the obligation to report them and include them in determining his or her taxes, something we know is not sufficient and it never has been, otherwise the government would not have gone to seek information from third parties with such commitment that from there we can in many cases pre-fill the taxpayers’ returns.

Greetings and luck


[1] A vampire story i , ii and iii

[2] https://www.cnbc.com/2017/12/20/litecoin-founder-charlie-lee-sells-his-holdings-in-the-cryptocurrency.html

[3] Initial Coin Offering

[4] For the effect, they could be described as cards.

[5] https://www.coindesk.com/ico-tracker/

[6] The distributed nature of blockchain and the design of tokens will require generating them (all at once or slowly) and register the blocks. These operations will have a cost and with some freedom here, we call those involved:” Miners”.

[7] https://blockgeeks.com/guides/dapps/

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2 comments

  1. David Deputy Reply

    Hi Raul,
    Nice job covering the landscape. I would like to point out there’s a couple of Blockchain/Digital Ledger industry developments to be aware of as they can help gain a much deeper view into the challenges and the latest on how they are being addressed. From the securities/ICO governance perspective, the general concept if to create a self regulatory organization in the securities domain – this is being recommended by the US SEC and others and efforts are rapidly emerging towards that end. See https://thebrooklynproject.consensys.net/

    At the technical level, we are also working to create a means of, as Christine Lagarde recommended, “use blockchain to regulate blockchain”. These general technical regulatory standards efforts efforts are just emerging with a meeting in NY this week to discuss various token classification regimes, PE/Nexus considerations and how to create registries, smart contracts and validation services for all types of regulation that are on-chain and can be trusted by taxpayers and government regulators.

    In the tax domain there’s:

    – a white paper coming out soon from the Chamber of Digital Commerce’s (https://digitalchamber.org/) Token Alliance initiative which lays out the income tax challenges with a US centric view. We are working on the final draft now. The Digital Chamber, of which Vertex is a member, engages with regulators in education and advocacy on policy on a global basis. We would welcome the opportunity to engage CIAT.

    – an industry sponsored Tax working group being formed this week by the Accounting Blockchain Coalition (https://accountingblockchain.net/) to address accounting & tax industry education and capture and dissemination of best practices as they emerge. This is a by industry/for industry education oriented non profit organization. which does not engage in advocacy but rather focused solely on industry education. We would welcome the opportunity to engage in fact based discussions with CIAT.

    Regards,
    David Deputy
    Director Strategic Development, Vertex, Inc.
    President, Accounting Blockchain Coalition
    Member, Digital Chamber of Commerce
    Contributor, Brooklyn Project

  2. Raul Zambrano Reply

    Hi David

    Thank you for your comments, links, and very useful information. The efforts you mention look promising and indeed we would be glad to join one of the initiatives mentioned.

    Not all tax administrations are looking at these developments with the same interest. And that could certainly end with some administrations getting late in the game.

    Due to the way our site works comments are dependent on the language you are accessing, so our Spanish speaking readers might loose your remarks. I will copy your comment so they could also benefit from it.

    Please keep in touch.

    Raul

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