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Virtual Currencies and Taxation

We are continuing our discussion about virtual currencies and the related issues. Because this is a burgeoning technology producing a wonderful array of blockchain innovations, regulators have struggled to determine how, or whether at all, they should regulate it.  It poses an array of novel legal questions, and its economic impact renders it of crucial importance.  Hence, it behooves regulators to assess the market and technology in order to tailor regulation. Also, many companies are not well versed in the areas of law that might affect them.  In fact, many simply follow suit, and repeat what they see other companies doing, and assume the technology’s novelty leaves them in the clear.  However, it can steer them into problems, and they often will not know they are not in compliance with the legal requirements.

In general, taxation is one area where policy matters is one that unfortunately pervades most people. Congress is currently laying the groundwork for new regulations that are innovated and tailored towards virtual goods and virtual currencies.  It is conducting congressional studies to see how best to accomplish the task. So, congressional hearings on the subject are a frequent occurrence on Capitol Hill.

As it stands, a number of states have already passed legislation imposing the taxation of “digital downloads.”  Although, this type of legislation is not directly aimed at virtual currencies and goods specifically, some state statutes are so broad that they could effectively envelop such areas.  To date, this is the extent of laws applying to virtual goods, virtual currencies, and virtual-currency transactions in our country. There has yet to be comprehensive and standard legislation that applies definitively to the whole country in these areas.  As a result, specific guidance on how to comply with taxes is spotty and unreliable, and there are no institutions that shine a guiding light.

Internationally, many countries are also considering implementing national legislation on the matter, and many others have already implemented it.  One popular example of taxation for virtual currencies and the transactions with it is the imposition of a tax on gains associated with them.  China, for example, has imposed a 20% tax on virtual-currency transactions.

At this legal juncture, it is important to keep core principles in mind.  The virtues and merits of virtual-currency technology run parallel to the virtues and merits of the modern world paradigm, and those of this country which leads it.  That is to say, blockchain technology, and the capacity to exchange and engage in commerce with it is merely one step to prosperity that liberalism and capitalism have brought to the world. It is important for governments to resist the urge to extract too much, or cash out on the entire value this new innovation has within it.  One of the strongest elements of virtual currencies is precisely the fact that they are unregulated.  Of course, their use for criminal activity can be a problem, but their option as a means to engage in commerce should be as unhindered as possible.  They are an experiment in the free market and free-floating currencies, and can teach the world a lot about the meaning of real economic value, interplay of market actors, and creation of wealth.  So, refraining from taxation could yield a truly unrivaled age of prosperity and rising quality of life around the world.

At our law firm, we help clients navigate through the legal obstacles.  Please do not hesitate to contact our virtual currency attorneys for any questions.