As part of The Token Handbook, I have just released The Tax Chapter — 8,000 words on tax treatment for crypto-assets. I have also included a short essay on how I think tax should work and how it ties in with a universal basic income. When I speak to audiences, few people know any of this stuff. This does not constitute professional advice, which you should seek separately. Here are some of the key takeaways:
Coins and Tokens are Taxed as Assets
Whether we like it or not, no cryptocurrency or token yet qualifies as money, and none of them is taxed like money. Think of them as taxed like gold or stocks — when you buy, you have a basis price, and when you sell you have a net gain or loss. You must compute this net gain or loss for the end of the year for each asset you hold, however briefly. You may also benefit from long-term capital gains treatment in some countries, like the US.
ICO Income is Taxable Income
If you raise money by selling stock to investors, you don’t pay any tax on that. However, if you raise by selling tokens, tokens are seen as a “good,” and that good has a value, and you have just received income for selling that product. Don’t forget to pay your tax on it.
Setting up a Nonprofit Foundation Avoids the Tax
You won’t pay tax if you set up a non-profit foundation before your ICO. You also won’t have any shareholders and will have to conduct your affairs as a foundation. This is another reason I keep saying ICOs are for project finance, not start-up finance.
Don’t Use a Transaction-Based Charging Model for Tokens
Both the ether fee price and the tax treatment make a transaction-based model impractical. If your project has raised a utility token, go to an all-you-can eat subscription or a staking model. In general, any payment less than about $10 isn’t very practical on the ether blockchain right now, though that may change.
Give Your Users a Proper Tax Report at the End of the Year
If your system works with cryptocurrencies or tokens, it makes sense for you to help your users compute their tax liability at the end of the year. Some companies have charged extra for this. A bit of extra programming will keep each account up to date at all times. You do this by asking for their tax currency and computing the value of each transaction in that currency and recording it. Then just add them up on demand and your client has a tax report.
Gambling and Betting Can have Different Tax Treatment
Some projects are declaring themselves gambling platforms, which benefits from different tax treatment in some countries, like the UK.
Tokens can have Serious Value when Allocated
As some people who went through ICOs last year have learned, when you are allocated your tokens matters, and it can matter a lot. Think through your allocation of tokens and try to do it as early as possible for the least gain. The initial gain when you accept your tokens will probably be counted as ordinary income for that year. You could potentially suffer an “IRS attack” if you pay a lot of tax for tokens that are valued highly in the months after an ICO and then go back down later.
Mining is Taxed as Ordinary Income
Most countries (not Belarus!) will tax your mining income as ordinary income.
Switzerland, Malta, Gibraltar, and some other jurisdictions do offer tax advantages, both for corporations and nonprofits. At the moment, Australia probably has the most sensible approach to taxing crypto-assets.
Paying People in Cryptocurrencies and Tokens
Paying your people in ether may seem like an easy, simple way to pay, but it has some serious downsides. There will be a tax liability at the end of the year. You may be responsible for withholding or paying part of it. Paying people in highly volatile instruments probably doesn’t make that much sense. It’s wise to pay mostly in fiat and maybe some in crypto-assets.
You May be Audited
Both your company/foundation and many of the individuals could draw an audit for last year or this year. Audits are expensive. This, unfortunately, is part of the ugly reality of trying to fit our new world into their old world. The people auditing your firm my have no idea what auditing means in this context — yet you may still have to do it. I list helpful resources at the end of my longer chapter.
Token-Based Accounting Systems
At Consensys, a smart group of people are developing the Balanc3 system to help solve many of these problems. As an early beta tester, I’m very excited and can’t wait for the system to come out.
How Should Governments Tax?
I’ll invite you to read my entire chapter, which advocates a smart-contract-driven consumption tax that goes hand in hand with a universal basic income. It should be easy to set this up and save people around the world perhaps $1 trillion in crazy tax fees, plus align incentives to make better financial decisions.
I hope this gives you some appreciation for the complexity of trying to invent a new world while still being governed by the rules of the old one. Tax treatment is different for different people in different places — be sure to seek the help of a tax attorney or advisor to put yourself on the right side of the law.