Crypto modernizes taxes: Can taxes finally be transparent and convenient?

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  Quantumrun Foresight
• October 24, 2023

Insight summary

Cryptocurrencies are emerging as a double-edged sword in the world of taxation. While their anonymous nature could hinder tax collection, experts argue that blockchain technology can streamline and even enhance tax systems. For instance, Buenos Aires plans to digitize citizen identities and allow tax payments in crypto, aiming for efficiency and economic growth. Meanwhile, CityCoins allows people to mine tokens for cities like Miami and New York, offering a new revenue stream for municipal governments. Despite these benefits, challenges lie ahead, such as the need for adaptive tax regulations and mitigating risks like market fluctuations.

Crypto modernizes taxes context

Most developed countries’ income comes from taxes levied on businesses, salaries, and, increasingly, consumption. For example, in 2016, the OECD (Organisation for Economic Co-operation and Development) member nations’ main revenue sources were 59 percent from wages (individual taxes and social insurance premiums), 32.7 percent from consumer spending, and 8.5 percent from corporate taxation, with other sources accounting for the remainder. Thanks to the privacy features of cryptocurrencies, it becomes increasingly difficult for states to track and tax incomes and business transactions. This could lead to a decline in state revenue as more and more people shift towards using this technology.

However, this does not mean that cryptocurrencies are incompatible with taxation. In fact, there are several ways that blockchain can be used to make the tax system more efficient and fair. For example, tokens could improve tax compliance by making it easier for taxpayers to report their income and transactions because of real-time ledger updates. Under the same “open book” principle, crypto could also be used to reduce tax evasion by making it harder for people to hide where their money is going. Because a community of users jointly verifies the validity of these transactions, agencies can easily track if there’s any fraud involved.

Disruptive impact

Convenience is perhaps the most significant benefit of paying taxes via crypto. For example, Argentina’s capital Buenos Aires is planning to use blockchain technology and cryptocurrency to digitize its citizens’ identities. The city will also allow its citizens to pay their taxes in cryptocurrencies through partnerships with local crypto exchanges. The use of blockchain for tax payments would be more efficient than traditional methods and allow for greater transparency. Additionally, by enabling citizens to pay their taxes in cryptocurrencies, the city of Buenos Aires could attract more investment and spur economic growth.

Meanwhile, crypto token CityCoins is using blockchain to pay taxes by having people mine coins for specific cities (e.g., MiamiCoin or NYCCoin) and trading them in STX, the token for Stacks. This protocol operates on top of the Bitcoin network. Municipal governments will receive 30 percent of the STX tokens mined. This gives cities a windfall and encourages people to have more faith in the local government, as they are able to see where capital is allocated. This system could potentially lead to more people paying taxes, as it is an opt-in system rather than an obligation. Ultimately, this could help cities generate more revenue and provide more services to their citizens. However, it is also important to note that some challenges need to be overcome before this modernization is achieved. The government will need to find ways to tax cryptocurrencies without stifling innovation. They will also need to ensure that the tax system can adapt as cryptocurrency technology evolves.

Wider implications of crypto modernizing taxes

Possible implications of crypto modernizing taxes may include: 

• More token creators partnering with local governments to launch coins that can be used to pay taxes.
• The government building an increasingly complex tax regulation that can cover offshore and digital transactions. 
• The wealthy hiring crypto experts to look for loopholes in this proposed taxation system.
• More cities allowing their citizens to pay taxes using crypto. However, this can result in more data privacy concerns and a blurring definition of what constitutes a “resident.”
• Risks in market fluctuations and crypto exchanges and coins dissolving overnight.
• More tech firms investing in digital payment gateways, crypto exchanges, and token technology.

Questions to comment on

• Would you be willing to pay taxes using crypto?
• What are the other potential challenges in implementing this taxation system?