Cryptocurrency & Robots: How to Tax and Pay Tax on Them
68 Pages Posted: 11 Dec 2017 Last revised: 3 Jun 2018
Date Written: December 6, 2017
New technologies, such as blockchain, cryptocurrency (e.g., Bitcoin), and artificial intelligence are rapidly changing how transactions occur in the United States. While scholars have started to examine how a number of areas of law should adapt, very little work has been done on what these changes mean for taxation. Yet these developments could have a huge impact on tax revenues. For example, some approaches to taxing transactions using cryptocurrency could result in these transactions being conducted abroad, beyond the reach of the U.S. taxing authorities. And if robots replace large segments of the labor force, this could drastically shrink federal and state income tax bases.
The approach to taxing new technologies is a careful balance of capturing value and not disincentivizing growth. For example, if governments decide to levy a “robot tax” to replace revenues the income tax is no longer generating, they may accidentally stifle innovation in that jurisdiction.
At the same time, these new technologies also provide tools that governments can harness to levy taxes far more effectively than they currently do. For example, using blockchain technology to track the history of income and company shares allows for the potential of an integrated tax system, which combines the currently separate corporate and personal taxes into one unified taxation regime. The effects of this transition are a removal of many distortions and behavioral inefficiencies.
Just because technology can be used to levy taxes far more creatively does not mean that it should be. But given the rapid rate at which technological change is occurring, governments cannot afford to sit back and make these decisions by inertia. Rather, the main argument of this is that governments should: (i) recognize and adapt to shifting tax bases; and (ii) use technology such as blockchain to better target the populations and behaviors desired to be taxed. The paper recommends specific examples of how to better tax and use technologies, such as blockchain, to reform current taxation schemes.
There is also ample discussion of whether cryptocurrency will be regulated as a security (as per the Howey test and recent SEC enforcement actions), a discussion of foreign jurisdictions' approaches to cryptocurrency regulation and taxation, and recommendations to the SEC and IRS on how they should adjust their taxation of cryptocurrency.
Keywords: Bitcoin, Cryptocurrency, Robots, Tax, Integration, Taxation, International Tax
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