This Article has been written by Musa Saidu, A Second Year Law Student at Ahmadu Bello University, Zaria, Nigeria.
Crypto currency, also called virtual currency, is a defined as a digital currency, because it existed only in a digital form as opposed to physical. It is a decentralized currency which works on blockchain, a distributed ledger technology controlled and enforced by different network of computers. One of the most outstanding features of crypto currency is that it is not issued by a central authority. Unlike paper money, the very existence of the system is so dispersed that it transcends the regulatory authority of any government and that makes it virtually impossible for any government to regulate either its creation or circulation or even to impose regulations on it. This particular feature of decentralization and blockchain would be the focus of this paper as they relate to government control, particularly, taxation.
Crypto currency, just like other currencies, is used for different purposes. The most common type of virtual currency is Bitcoin. It was the first ever crytocurrency to be created. After Bitcoin was launched in 2009, many other virtual currencies were created and they are referred to as Altcoins or alternative coins.
Since the inception of crypto currencies in 2009, their use has been expanding globally, with more people showing interest in investing in it and different companies and institution accepting to sell their goods or offer services in exchange for a crypto currency. It has continuously gained popularity and recognition day by day.
Although crypto currencies have been in existence for over a decade, there is still no standard definition of what crypto-assets are, but two elements are necessary in the definition of any digital financial asset; a distributed ledger technology (DLT) and cryptography. What is more, many countries in the world have different views on the legality of crypto currency. Basically, there are five different views according to Organization for Economic Co-operation and Development (OECD); the first of which is a general ban on the use and transacting with virtual currencies, Saudi Arabia, Bolivia and Morocco are fall under this category. Second is ban on commercial trading platforms. Third is ban on using virtual currencies as means of payment Ecuador and Indonesia are examples of jurisdictions with such ban. The fourth category is ban on initial coin offerings. (China and Korea). The last category is ban on the financial sector, this ban relates to prohibitions on the financial institutions of a country from participating/getting involved with any transaction that has to do with crypto currency, and Nigeria is among such countries.[i]
Given the complexities surrounding crypto currency, executing a tax on it is difficult if not impossible because blockchain, which facilitates the operation of crypto currency, is based on a high level of encryption that only the owner of a particular wallet has access to what is in his account and that high level of encryption encourages tax evasion by the persons owning crypto currency. If government authorities are unable to know the gains and losses of the people, I wonder how possible it will be for them to impose tax on them. It is only when the citizens themselves decided, out of good faith, to perform their constitutional duty of paying their taxes. Could even a country impose a tax on something as dubious as crypto currency without having a well-constructed policy regarding it? Of course not.
Taxation covers a wide range of income from the income one gains in the form of money for services or even a property that one owns. To make things easier for them, the Internal Revenue Service (IRS) has classified crypto currency as a capital asset and subjected it to the capital gains tax rules, consequently, the IRS can tax crypto currencies when they are sold at a profit. It is interesting that the nature of crypto currency is somehow changed by the IRS and other countries from a “currency” to an “asset” or “property” for taxation purposes. This means whenever person a person has traded a crypto currency for a particular goods, then what he basically did was, he “sold” his crypto currency (asset) for a profit (the goods exchanged) and as a result, such person owes capital gains tax for the transfer of his asset (crypto currency) to the buyer (in this case, the seller of the goods). The crypto currency will only taxed if it had gained value from the time the owner purchases it and only the profit is going to be taxed. For example, if you buy a $10,000 worth of bitcoin in 2020 and held it till 2021 and you want to sell it by 2021, if the value of the bitcoin has risen to $30,000 then only $20,000, which is the profit you realized, is going to be taxed.
That is for the countries that have fully legalized the use and operation of crypto currencies in their jurisdictions. But there are countries that do not provide guidance on the tax treatment of crypto currencies, and they are the majority. Instead of trying to block and illegalize the use of virtual currencies in their countries, many countries have come around to start formulating policies that will incorporate the operation and use of virtual currencies in their countries. The governments have realized that technological advancement is inevitable. The growing popularity of virtual currencies poses a threat to the existence of the conventional banking system because of the many advantages it offers to people such as lower costs and faster transactions compared to traditional banking system. There is also no delay in transferring a massive amount across international borders. What can be called the most important feature is that it offers a high level of security; the entire process and the records of transactions are encrypted and as a result, no one is able to know how much one has in his account/wallet, this offers people security from getting their accounts occasionally frozen by government institutions because of suspicions they may have, but this same advantage turns out to offer a safe haven for people to evade paying their taxes and gave room for facilitating illegal economic crimes such as money laundering and even sponsoring criminal activities without the knowledge of the government. Because of its pervasive nature, different jurisdictions are now making policies to at least monitor it, since controlling it is impossible, at least for now.
Some countries have banned the use of virtual currencies just because of its unconventional nature; playing safe, but later the use was allowed after careful review although yet to come up with a policy that addresses the issue of taxation. The common example is when the Reserve Bank of India put measures that outlawed the use of virtual currencies and the Indian Supreme Court ruled against it. Egypt is also a good example where it was initially banned by the Grand Mufti but later allowed by the Egyptian Central Bank with the condition that license is obtained from the bank by the ones to trade in virtual currencies.
CONCLUSION
The definition, classifications, and the legal status of crypto currency has been largely variant due to the complexities surrounding the phenomena itself. The complexities ranges from the different slight distinctive variation from one virtual currency to another (including hybrid characteristic), to its radical nature that makes it different from other conventional currencies such as high volatility, which in turn, affects its ability to serve as a store of value as other forms of currencies do, down to its limited acceptance as a means of exchange as only limited traders accept it. Banning the use of crypto currency is not a viable option for countries as banning cannot stop people from using it illegally, rather legislations should be made that would incorporate them under the jurisdictions to ensure developments as more complex and advanced technologies are developed everyday which basically challenged the existing legal frameworks. If every technological advancement that does not suit the existing legal framework is going to be banned, then there would hardly be quick evolution at best and the people might revolt since they benefit from it.
The field of law is dynamic and has adapted to many different situations through the ages. This current challenge posed by the introduction of virtual currencies and blockchain is no different, we just hope that lawmakers acted fast and come up with laws that is adaptive enough to cover even future technological developments so that the law will not be left always to be playing catch up in regards to technological advancements.
[i] OECD (2020), Taxing Virtual Currencies: An Overview Of Tax Treatments And Emerging Tax Policy Issues, OECD, Paris. www.oecd.org/tax/tax-policy/taxing-virtual-currencies-an-overview-of-taxtreatments-and-emerging-tax-policy issues.htm
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