What is the Blockchain?

 Posted on July 12,2017 in Taxation Law

Bitcoin, a digital currency, has gained popularity and utility in the last few years. Released in 2009, Bitcoin has been lauded as a superior currency accepted throughout the world and able to be transferred more efficiently than traditional denominations.

Bitcoin and other digital currencies like Ethereum are based on a technology called the blockchain. The blockchain is a digital ledger that keeps track of economic transactions. The blockchain has recorded every Bitcoin transaction that has ever occurred, for example.

The blockchain is considered incorruptible because it is publicly available and not stored in a central location. Instead, copies of the ledger are constantly being updated and reconciled on millions of computers across the world. Without this technology, cryptocurrencies would not maintain their integrity.

While cryptocurrencies rely on the blockchain, it is widely thought that the blockchain has other uses, such as the recording of deeds or the formation of contracts. In whatever context, such transactions are usually still regulated and taxed by the IRS. Those involved in this emerging market could be subject to fines, penalties, and interest if they do not understand and comply with these tax obligations.

Bitcoin and Taxation

The IRS considers Bitcoin to be property and not money for purposes of taxation because Bitcoin is not regulated by a country or central bank. Examples of taxable events involving Bitcoins include:

• Bitcoin mining;
• Sale using Bitcoin as the currency;
• Payment of wages or salary in Bitcoin; and
• Capital gains or losses on the sale of Bitcoin.

Because Bitcoin has risen in value substantially over the last few years, many who bought early and have sold recently will have incurred a capital gain. For example, the price of Bitcoin in 2011 was $9, and today the value typically hovers around $2,500.

Nevada Bans Taxation of Blockchain Transactions

Nevada is the first state to prohibit a local government from taxing blockchain use. The law, enacted in June 2017, also banned requiring licensing for utilizing blockchain.

Some industry experts believe that this new law will be on the radar of other states looking to harness the potential of the blockchain. In March, Arizona enacted a law recognizing smart contracts and blockchain signatures as legally-binding.

Contact a Santa Clara County Blockchain Tax Lawyer

Cryptocurrencies are rapidly evolving and expanding. With such changes, the tax laws that may apply to cryptocurrency transactions and other uses of the blockchain can be unclear and unsettled.

A tax attorney can provide important counsel as to your liabilities in these cutting-edge areas. Call the experienced San Jose cryptocurrency tax attorney at John D. Teter Law Offices by dialing 408-866-1810.

Sources:

https://blockgeeks.com/guides/what-is-blockchain-technology/

http://www.coindesk.com/nevada-first-us-state-ban-blockchain-taxes/

https://www.irs.gov/pub/irs-drop/n-14-21.pdf