The Evolving World of Tax, Regulation & Blockchain Technology
by Don Plenter
A Shakeup of Unforseen Proportions is on the Horizon… an Avalanche
Let's face it. The world is changing – probably as fundamentally as what the industrial revolution did for society. More so than what the internet did for the world of commerce and information management. Skeptic or visionary? We'll see a new generation of innovators, who are rightfully entitled to the accompanying wealth which ensues. If you dare to be out front, you just may be one of the “lucky” ones.
Profound Impacts on Legal, Accounting, IT Management, Government Systems
Take inventory of what you get paid to do, and if blockchain can be used to, well, eliminate you in the “process chain”, it will swiftly do so. The best advice I can suggest, is to re-tool your offerings.
People pay for results. If they can be achieved in a way which is better, faster and cheaper, then those solutions will emerge. There are thousands of very smart folks beavering away in cubicles right now, trying to figure out how they can profit, by putting you out of a job. Do not ignore blockchain.
Your best protection, professionally, is to move away from anything that can be functionally automated. Get paid for what you KNOW, not for what you DO. If you get paid for filing returns, checking titles, or any type of process work that can be linked right through from employment to debt servicing to purchases, tax filing and any financial or asset/income based activity – creating a soup-to-nuts contiguous chain – your functional input value will drop off the cliff. So will your income, and it can happen at lightning speed. Like the train you never saw coming.
You'll need to re-tool, re-think, re-brand. Do whatever it takes, to ensure that your value proposition to a paying customer or client, is more than electronic and procedural. Now, more then ever, value will be measured in the interpretation of information – not in the management of information.
This is the beginning of the “ice age” of mundane process, and the emergence of virtually limitless and exciting opportunities for those who can see even a little bit past their next billing cycle.
For instance. One of the key implications and impacts that blockchain technology will have on real estate is through the transformation of the public record system. Most likely because the conveyance of records is cumbersome. Title verification is expedited significantly, and fraud attempts can be quickly rejected – since there would be a missing link in the “chain”. If we take it to the next level, through the employment of “smart contracts”, a lawyer's role is dramatically reduced – or even eliminated. By coding automatic delivery against payment on the blockchain, title is changed and the money is delivered in a “smart” single step process.
This example is a mere pin-head on the tip of a gargantuan iceberg of implications of the blockchain technology.
January 2018 Update on U.S. Regulation
This “thing” called cryptocurrency is a new and exciting opportunity. But, like all opportunities, the rewards and risks are commensurate. In fact, there are a number of challenges which need to be understood before one takes the next step. Keep in mind, that the greater the opportunity for gain – so too – the potential for loss. But opportunity is nevertheless alluring.
For many people, cryptocurrency is not just a new type of “money”, but also an investment as an asset. So it can, in theory, serve as both a “medium” of exchange, and a “store of value”. Not something any fiat currency in the world can claim today.
What is interesting though, is that the IRS explicitly describes Virtual Currencies – VCs as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value [and] does not have legal tender status in any jurisdiction.” The significant difference between fiat and virtual currency, is that virtual currencies themselves are the value, they don't have a claim on value.
With respect to bitcoin, we still don't exactly know what it will be. It's functionally possible to use it as money. It's value is growing, so it makes a good asset (depending on your risk tolerance). However, with Bitcoin at least, high fees, wide spreads and significant mining (processing) fees veritably prohibit – at the moment – smaller transactions in any practical way. However, we still have a way to go to see what Bitcoin's primary – or even exclusive – role will be in the marketplace.
Although changes in the landscape are accelerating, our current market intelligence is as follows. Please feel free to drop us a line if you feel the information is either inaccurate or out of date.
We are not lawyers, or accountants, but seek to provide as much insight as possible based on our own findings and interpretation of events and issues. Before you take any action based on what you read herein or on this site, please consult with your own trusted legal, accounting or financial professional.
The Securities and Exchange Commission
The SEC has not as of yet approved any exchange traded products, like ETFs holding cryptocurrency or related assets. Consequently, it has not yet registered any initial coin offerings (ICOs) yet.
Commodity Futures Trading Commission
The CFTC on the other hand has designated Bitcoin as a commodity, and that the regulation of commodity futures, as well as any fraud or manipulation falls under its authority.
Internal Revenue Service
Looking at the taxation side of things, the Internal Revenue Service (IRS) says Bitcoin must be treated as property for tax purposes. Which then means that a record of capital gain or loss is required, just like any exchange of property. If the owner decides to hold on to it, then it will be treated like inventory with ordinary loss and gain rules kicking in. To handle the issue of using Bitcoin as a form of payment, the rule is that it's treated like a currency, though it must be converted at its fair market value, as verified on an exchange.
This has effectively placed virtual currency into a favorable position for retirement account investors – keeping risk and volatility in mind of course. And these are no small considerations, so caution is required, not to mention due diligence – before taking the plunge.
State Level Regulation of Blockchain Technology
The other issue that is equally important surrounding this new technology is the use, application and promotion of the technology itself – namely, blockchain. Several U.S. states are in the process of approving the implementation of various types of applications involving blockchain technology. For example, the implementation of smart contracts, or the registration of shares. The possibilities of application will invariably become virtually unlimited.