Group CEO and Managing Partner, MMJS and Kreston Menon
Surandar Jesrani is the CEO and Managing Partner at MMJS Consulting. A chartered accountant by qualification and entrepreneur by nature, Surandar prior to founding MMJS was in key positions at HSBC Private Equity, Infosys, L&T and GM.
FAQ; Tax Implications of Blockchain
March 9, 2022
The regulatory environment for Blockchain is rapidly changing. This new technology continues to revolutionize social and economic activities. The frequently asked questions (‘FAQs’) below expand upon the meaning of Blockchain, its usage, and corresponding tax implications.
What is Blockchain?
Blockchain is a list of records called blocks that store data publicly and in chronological order. The information is encrypted using cryptography to ensure that the privacy of the user is not compromised and data cannot be altered. Blockchain technology provides the infrastructure for Cryptocurrency, as well as Blockchain-based data systems.
Is there a possibility of error and fraud in Blockchain?
Data in the Blockchain cannot be altered and it is inviolable, however, it is possible that developer of Blockchain might enter incorrect information in the Blockchain at the inception itself which could lead to errors and fraud. Thus, Blockchain in itself does not prevent fraud in its entirety.
What does Blockchain mean for tax authorities?
Blockchain is likely to add value for tax authorities because it provides accurate information that can be shared. It may allow timely collection of transaction-level data by the tax authorities and aid them in identifying tax leakages.
What about Transfer Pricing implications on Blockchain?
Blockchain could be a potential Transfer Pricing Tool. At present, Blockchain technology is relatively new, however, it could potentially be a revolution for transfer pricing. While Blockchain is not likely to eliminate the informational lacuna that tax authorities face when auditing transactions with foreign affiliates, Blockchain could shed light on the supply chain of a multinational enterprise and reduce the knowledge gap. A Blockchain could also enhance the reliability of transfer pricing documentation and accounting records, which could lead to a reduction in compliance costs.
What are the possible areas in which Blockchain technology can be used?
Blockchain technology can be used to store any kind of data, like medical, health information, etc. However, it is being widely used for trading in cryptocurrency currently.
How is Blockchain related to Cryptocurrency?
Blockchain is a database of all crypto transactions done anywhere in the world at any time. It’s a system of storing information in a way that makes it difficult to change, hack, or cheat the system. A public ledger, blockchain distributes the information of all crypto transactions across the network of all connected computers, so that everyone can view the data, including crypto mining and trading. It does not have a central control or single authority. As of now, Blockchain’s most well-known use is in cryptocurrencies.
What is a Cryptocurrency?
Cryptocurrency is a digital or virtual currency (or token) that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on Blockchain technology which is a distributed ledger enforced by a disparate network of computers. Cryptocurrencies (such as Bitcoin, Ethereum or Litecoin, Dogecoin (DOGE), Cardano (ADA), etc.) can be used to buy goods and services.
What Cryptocurrency transactions can be taxed?
Few examples of Cryptocurrency transactions that could be taxed would include exchanging Cryptocurrency for other Cryptocurrencies, mining of Cryptocurrency, paying for goods and services with Cryptocurrency, etc.
What is mining for Cryptocurrency?
Mining is the concept of researching transactions and updating public record with the intention of receiving Cryptocurrency as a result of work performed. If it is a regular activity and income begins to generate, then it may attract tax at the time it is sold or exchanged.
Should Cryptocurrency be treated as Currency or Property?
It is likely that Cryptocurrency would be considered as property, not currency for taxation purposes. For instance, the Internal Revenue Service of the United States has treated Cryptocurrency as property and general tax principles applicable to property transactions are applied to transactions using Cryptocurrency.
Will I recognize a gain or loss when I sell my Cryptocurrency for real currency?
Yes, when you sell Cryptocurrency, any capital gain or loss on the sale should be recognized. Further, it is likely that certain Cryptocurrency specific costs may be allowed as a deduction (such as transaction fees, advertising cost, contract drafting cost, etc.)
How do I identify a specific unit of Cryptocurrency?
You may identify a specific unit of Cryptocurrency either by documenting the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units of a specific Cryptocurrency, such as Bitcoin, held in a single account, wallet, or address.
This information must show (1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.
How do I account for a sale, exchange, or other disposition of units of Cryptocurrency if I do not specifically identify the units?
If you do not identify specific units of Cryptocurrency, the units may be deemed to have been sold, exchanged, or otherwise disposed of in chronological order beginning with the earliest unit of the Cryptocurrency you purchased or acquired; that is, on a first in, first-out (FIFO) basis.
Do I have income if I supply someone with goods or services and that person pays me with Cryptocurrency?
Yes. When you receive property, including Cryptocurrency, in exchange for performing services, you should recognize the income.
How do I calculate my income if I supply goods or services and receive payment in Cryptocurrency?
It is likely that the amount of income should be the fair market value of Cryptocurrency when received. In an on-chain transaction, you receive the Cryptocurrency on the date and at the time the transaction is recorded on the distributed ledger.
What are Cryptocurrency investments?
If your Cryptocurrency is bundled in a fund or other investment and it generates income, it may be taxable.
What if Cryptocurrency generates income?
If Cryptocurrency is in an account or other exchange that generates any type of income, then the income may be taxable.
What could be the benefits of Blockchain in the world of tax?
Blockchain could help in tracking where and when tax has been paid and hence, reduce tax fraud. Further, taxpayers can be benefited from the efficient collation of data requirements for tax authorities across multiple jurisdictions. Storing data in Blockchain would lead to enhanced data security and control and would assist in the extraction of real-time information.
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