Tuesday, January 8, 2019

What The G20 Should Know About International Cryptocurrency Tax Policy

International cryptocurrency tax policy can achieve trust if it is done correctly, writes Michael Minihan, partner at BX3 Capital

Satoshi’s seminal whitepaper on Bitcoin came out 10 years ago this week. In the roughly eight-page treatise, the still-pseudonymous author writes of a currency that relies solely on electronic transactions, using a digital signature to ensure trust, rather than in a fiat value set by a brick-and-mortar central bank. Essentially, Bitcoin – and by later extension cryptocurrencies – from its very inception was meant to transcend governmental boundaries.

A decade later, cryptocurrencies are not impervious to domestic or international borders. In the US, federal law on cryptocurrency – or largely the lack thereof – has prompted some American players to decamp offshore. From a global standpoint, cryptocurrency’s border fluidity has also become a sticking point in foreign policy. At the G-20 meeting in Buenos Aires, leaders from the world’s 20 wealthiest nations signed a joint declaration on digital currency calling for "necessary reform" to "crypto-assets" to combat money laundering and implement a straightforward international tax system that accounts for and accommodates cryptocurrency. Section 26 of the G-20 communiqué states: "We will continue to work together to seek a consensus-based solution to address the impacts of the digitisation of the economy on the international tax system with an update in 2019 and a final report in 2020."

This timeline is an admirable goal, if not a bit optimistic. When it comes to international tax treaties, decisions often move at a glacial pace. Moreover, international organisations such as the OECD have been playing a game of tax haven whack-a-mole for years, with jurisdictions and individuals finding workarounds to tax agreements nearly as soon as they’re inked.

Considering that in the realm of cryptocurrencies, technology can get deemed a legacy platform within months, any international tax framework is going to have to be both broad to encompass new developments coming down the pike, as well as thorough enough to fill in any loopholes before they emerge. Some suggestions have already been published for a working framework for US cryptocurrency tax policy. Many of the takeaways that would prove useful to the IRS are applicable to organisations responsible for formulating international tax policy; namely an emphasis on:

  1. Supporting economic expansion
  2. Promoting innovation
  3. Encouraging adoption of technology
  4. Equitably generating tax revenue; and
  5. Ensuring adequate and useful disclosure.

Thanks to the work of international policy organisations, much of the blueprint on how to handle cryptocurrencies from a cross-border taxation perspective is already in place. The key to ensuring policy effectiveness for virtual currencies is the same as for traditional, fiat currencies: a commitment to clear and thorough reporting.

Authorities need data to codify and hone tax policy, and continue to analyse to ensure the success of resulting treaties. Investors, issuers, and other interested parties from all signatory countries are indispensable to ensuring quality treaty development. Data reporting on international taxation should incorporate these facets:

1. Issuer reporting:

  • Who was the issuer, and what is its profile? What was its country of origin, and of operation?
  • What was the nature of the cryptocurrency that was issued? Was it a digital representation of equity, debt, voting rights, or prepaid service?
  • How much was raised?
  • What has happened to the raised funds?
  • What executions have been taken against token obligations for security tokens; that is, dividends, interest, and so on.

2. Investor reporting:

  • Name of token
  • Exchange where traded
  • Number of tokens held
  • Dates of acquisition
  • Value at reporting date; and
  • Investor’s basis in the token.

3. Transactional reporting:

  • Informational reporting on the utilisation of tokens, especially when used as a payment mechanism;
  • Characteristics of payment recipient, including corporation vs. individual; jurisdiction of residence;
  • Value of payment in appropriate fiat measure; and
  • Tax withholding, as applicable.

In addition, a true global framework will require amendments to numerous bilateral income tax treaties. This is a highly complex undertaking because not all countries treat the underlying digital representation the same way, much less the taxation of that digital item. For example, two countries may use a treaty to agree on how a dividend should be taxed, but they start from a place where both countries agree what a dividend is. With cryptocurrencies, there is likely a need to first resolve how a token should be treated (e.g. security vs. utility vs. other) and then, resolve how to tax that item.

The aims of international cryptocurrency tax policy are optimistic: ensuring cooperation and information flow across borders for a storage of value whose very intent was to be borderless and unencumbered by regulation. In essence, then, cryptocurrency is in itself an experiment in optimism.

The leaders of the G-20 are correct: Digitalisation of currency is an indelible aspect of the global economy. With the right guidance in place, international cryptocurrency tax policy can achieve trust. And is not that the very goal of cryptocurrency and international organisations alike?

The above article was published on www.internationaltaxreview.com on January 7 2019 and has been republished with the approval of the Publisher.

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