Here's Why Crypto Taxation is a Good Thing

Back in February this year, outspoken Bitcoin maximalist Tim Draper gave an interview to Fox Business. During the interview, he predicted that cryptocurrencies would go mainstream within the next five years. Of course, Draper is known for his notoriously bullish forecasts, having previously called Bitcoin hitting $250k by 2023. However, his five-year timeline for crypto going mainstream may end up being conservative, based on the significant forward momentum in 2019 so far. 

Draper’s prediction was made in response to the news that JPMorgan was developing its own cryptocurrency. However, only a few months later, Facebook announced its Libra plans, placing cryptocurrency on the front page of news outlets all over the world. Never one to miss out on the opportunity to express an opinion, Donald Trump also weighed in on the topic to assert his disapproval, inadvertently boosting the price of Bitcoin.

Trump’s reservations notwithstanding, institutional cash is also flowing into the space at an unprecedented rate. Furthermore, New Zealand has just announced it’s now legal to pay employees in cryptocurrencies. In reporting the story, the Financial Times noted the conflict with a previous ruling by the Wellington Inland Revenue that cryptocurrencies are taxable as property. 

Surely there can be no better indicator of something going mainstream than when the taxman starts coming after it. In the US, the IRS also treats cryptocurrencies as property and has done since 2014, when it issued a guidance notice on the subject. Nevertheless, this has also recently become news as the tax office initiated an enforcement campaign, issuing letters to more than 10,000 people regarding their tax obligations on cryptocurrency-related activities. 

As perverse as it may seem coming from a crypto-enthusiast, there is a case to be made for taxing cryptocurrencies. For sure, the individual crypto user is entitled to feel a little aggrieved that they now have to cough up taxes - even backdated ones- on their transactions. But taking a holistic view, the taxman’s sudden interest does have some positive implications for the sector as a whole. 

The cypherpunk movement has always cultivated its image as anarchic and outside the law. Ross Ulbricht did the crypto space no favors by having it associated with Silk Road. But while this kind of reputation appeals to a particular group, the average law-abiding member of Joe Public may feel differently. Perhaps they don’t feel comfortable putting their earnings into a currency they fear may become outlawed in the future. Making crypto taxable lends it legitimacy, which may end up fueling wider adoption. 

Furthermore, for a business or other enterprise, the legitimacy of a payment currency matters a lot. If an enterprise has confidence that cryptocurrency is lawful and understand how they can treat it in their books, it makes them more likely to accept it as a method of payment. Again, this can only help to encourage mainstream adoption. 

At the time of writing, the global cryptocurrency markets are worth around $300 billion. While it’s difficult to quantify the proportion of this value that’s taxable in the US, it will nevertheless represent a significant revenue stream for the US government. Therefore, given that the markets are only likely to grow in the long term, it seems a pretty safe bet at this point that the US is never going to ban cryptocurrencies. 

Along with having to pay taxes, crypto holders in the US have a further another reason they're disgruntled. The IRS Notice 2014-21, which details the treatment of cryptocurrencies as property, isn’t exactly an easy read. Even for the more linguistically-savvy, it’s quite difficult to work out how the rules apply to all the scenarios in the crypto universe. 

For example, airdrops and forks both generate a “free money” situation that isn’t earned income or a capital gain. For traders particularly, applying the rules becomes exceptionally complicated if you’re moving funds around between different cryptocurrency pairs. The costs of employing an accountant who understands both cryptocurrency and how to interpret the tax rules could end up becoming exorbitant. 

Therefore, it’s easy to see a potential market for Bittax, a company which provides a platform using blockchain technology to bridge the chasm between your cryptocurrency-related activities and the IRS reporting requirements. You enter your wallet addresses, and the algorithm traces all of your crypto transactions throughout history. 

Once it has done its work, you’ll have an accurate and reliable report to provide to the IRS. But to prevent you from getting tangled up in tax reporting in future fiscal years, you can also use Bittax’s beta platform to plan ahead. It will calculate which cryptocurrency you need to sell optimized your tax position, taking long and short term benefits into consideration. Of course, it can’t eliminate the pain of having a tax obligation on your cryptocurrency transactions. But using a platform like this could make your reporting requirements a lot less painful. 

For the individual, nobody is expecting cryptocurrency taxes to be welcomed with open arms. But for the sector as a whole, in the long term, crypto having an official tax status is a force for good. 

Of course, Trump’s generalized pronouncement that criminals use cryptocurrencies is based on outdated assumptions. Nevertheless, Bitcoin can still use all the help it can get in leaving the Silk Road days behind it. Cryptocurrency taxation provides the kind of much-needed legitimacy that can only serve to propel mass adoption.