Taxation as a Barrier to Blockchain Innovation

Abstract

Though it is not the only cryptocurrency in circulation, Bitcoin has been one of the dominant and more highly valued digital currencies in the blockchain family. The IRS recently decided to treat Bitcoin and all other cryptocurrencies as property, thus causing ownership interests in these cryptocurrencies to generate a taxable transaction any time they are sold or traded for another good or service. We argue that taxation of cryptocurrencies and the recordkeeping necessities that come with it serve to inhibit the innovation in and growth of what could be an extremely valuable new commodity, the blockchain itself. We offer alternative strategies to mitigate the potential effects of these types of regulatory tax policies. Our work is the first to offer an analysis of the implications of tax policies on the development of blockchain technologies.

Keywords: Taxation, cryptocurrency, bitcoin, blockchain

JEL Classification: B53, H20, O31