Financial technology (FinTech) is a hot topic today. Open a newspaper or check the headlines on internet and there is an article concerning FinTech, whether it is the trends on cryptocurrency, online investing or new technological ways to pay (i.e. smart-phone touch-pay).
We are living in a time where people are creating new and innovative ways to make the economy getting along with the technological movement. However, apart from their commercial and audit benefits, all these new FinTechs need to be tracked from a tax-perspective, as it involves financial transactions.
Cryptocurrency is just another booming market where there is no underlying tangible assets. It contains the most basic way money has its value: the belief of people. The only difference of cryptocurrency to already used currencies is that there is no physical money available, making it somewhat difficult to convince the crowd to get used to it. But when you think of it, Facebook is world’s largest media platform, yet it barely creates any content, Netflix is the largest streaming company creating almost no content, Uber does not have any vehicles of their own and Airbnb competes with the world’s largest hotel chains even though it does not have any properties. The belief of the crowd is yet to develop, but seeing the belief in other products without any embodiment, it will rise again. The doubts are visible within the cryptocurrency market, which is more volatile than ever. The market decreased over 64% in market volume over a period of January 8 2018, where the market reached its highest point yet, to July 24th 2018. Nevertheless, the market is still holding up to at least 150.000 transactions a day using only Bitcoin.
But how can these transactions on the web be tracked, since it is also an opening for criminal activities such as money laundering and anonymously financing. Cryptocurrency is traded through anonymous wallets somewhere on the internet, only connected to a person through a username and password received through an email.
Tax Authorities have a hard time tracking this, however, they have taken some steps. There a certain legislations in development in order to control the cryptocurrency. For Australia, Japan, Singapore, the UK and the US applies that the value of the currency is measured at the point of receiving or using the currency. However, how it is taxed can be different in each country, the US and Australia for example treats cryptocurrency as property, not as a foreign currency what you might expect. Japan on the other hand classifies gain or loss of the coins as miscellaneous income. As said, these moments of taxation take place whenever a coin is acquired or sold/used, purely aiming on you timing on using your coins.
Just saying that you need to indicate you belongings, including your cryptocurrency is a first step, but those who have bad intentions will not meet this requirement. Showing that the Internal Revenue Services (IRS) is persistent, they involved in a case in November 2017. They told the court that they needed access to the account details of Coinbase, a large cryptocurrency exchange, in order to weed out costumers who were avoiding taxes. This database contained over 480.000 clients of Coinbase. On top of that, there are plans to require online platforms to carry out due diligence on customers and report suspicious transactions by the European Union. The Australian Tax Authorities (ATO) advises taxpayers to keep records of cryptocurrency transactions in order to help them be compliant with their tax obligations, however, deliberately avoiding the obligations will be on the receiving end of their actions.
A more recent development is that the IRS has joined with tax authorities from Australia, Canada, the Netherlands and the UK to from the Joint Chief of Global Tax Enforcement (J5), to do more to tackle tax evaders. The J5 will collaborate with the OECD, and has similarities to the in 2014 established Joint International Tax Shelter Information and Collaboration (JITSIC). Unlike JITSIC, the J5 will engage in joint tax investigation and use increased data analytics and investigation technology in its work.
Out of these technological developments and concerns we can conclude that tax authorities are trying to make up for their lost grounds by creating new groups, requirements and patrolling on new internet-highways. The development of blockchain in the economic sector should both complicate and help things for the tax authorities, meaning that they should adapt this knowledge whenever they can in order for them to use this in their advantage. The involvement of the General Data Privacy Regulations (GDPR), introduced on 25th of May 2018 should not complicate the situation in Europe, where it is expected to see more cases like the IRS versus Coinbase.
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