Legal Insights (March 21–28): Paying and Taxing Cryptocurrencies

The digital asset policy sector was relatively quiet last week, with regulators and lawmakers in most key jurisdictions returning to their offices to do the necessary homework. In the United States, federal agencies continue to process the various reports that President Joe Biden's recent executive order directed them to produce. In the UK, the central bank and the Financial Conduct Authority (FCA) have also published position papers on cryptocurrency-related issues. After much deliberation, financial authorities in Thailand have publicly opposed the use of cryptocurrencies as a means of payment, while in Honduras there have been rumors about the possible adoption of cryptocurrencies as legal tender, which have since been denied.

The relationship between digital assets and taxes was a compelling theme throughout the past week. Few would argue that cities or even states that offer voters the option to pay taxes in bitcoin are doing God’s work and helping to expand cryptocurrency adoption. On the other hand, digital assets themselves are subject to taxation, a stance that does not necessarily lead to the legalization of cryptocurrencies. Contrary to what one might think, India’s approach shows that it is possible to impose heavy taxes on cryptocurrency transactions while remaining vague about the asset class’ legal status.

Crypto City Life

As sprawling national legislatures and executive agencies take time to develop comprehensive encryption policies, city councils in the U.S. and elsewhere are filling the void. Austin, the capital of Texas, has taken an optimistic stance on cryptocurrencies, passing two resolutions aimed at promoting blockchain-based innovation. Word has it that the city will soon launch its own CityCoin, joining cities like Miami and New York. The mayor of Portsmouth, New Hampshire is pushing to allow residents of the city to pay for city services with bitcoin and other cryptocurrencies. In Brazil, Rio de Janeiro is poised to start accepting bitcoin for real estate tax payments as early as 2023 — a fairly short time for a city of nearly 7 million residents.

Taxes vs. Digital Assets

India has been accelerating the pace of introducing new tax rules for cryptocurrency transactions. Despite strong opposition from industry stakeholders, citing a range of reasons why heavy taxes on cryptocurrencies may not be the suboptimal policy option, the Indian crypto community will face a 30 percent tax burden from April 1. India's finance minister, Nirmala Sitharaman, who introduced the framework, has previously said that taxing something does not give it legal status. In essence, one of the world's major crypto markets is setting rules to treat digital assets as gaming profits and lottery wins. Details on how laws related to decentralized financial activities will be enforced have also been lacking so far.

America No Longer Partisan

Enough has been said about how important it is to prevent cryptocurrencies from becoming an issue that entrenches deep partisan divides in America’s polarized political system. So far, things have gone fairly well, with both Republicans and Democrats in the U.S. having allies in the crypto space. The spirit of bipartisanship has been further cemented by the unlikely coalition between U.S. Republican Senator Cynthia Lummis and Democratic Senator Kirsten Gillibrand, who revealed they will work together on a sweeping bill to classify digital assets and Draw clear boundaries for the powers of regulators.

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