With the current regulatory climate heating up fast, it appears that all gains made from cryptocurrency trading are appearing to be subject to vast amounts of taxation.
The IRS has made summons on exchanges, passed bills and assigned teams to crackdown on potential tax evasion on the part of those in the crypto-community. It claims that less than 100 tax returns last year were filed reporting cryptocurrency gains.
As a result, flocks of cryptocurrency holders are packing up house and home to move to Puerto Rico. The country is currently wrecked from the woeful after-effects of Hurricanes Irma and Maria. And in fact, it was following Hurricane Maria that Brock Pierce and other blockchain giants saw the opportunity to create their cryptocurrency dreamland in the country.
So, what stands to be gained and what stands to be lost?
There are no federal personal income taxes, no capital gains tax and decent business taxes for Americans in Puerto Rico. It essentially operates its own parallel tax system and is the perfect haven to continue to grow their riches, The New York Times reports.
However, there are several unanswered questions that remain to be resolved as relates whether the IRS can enforce taxation upon a resident of the country if they have been living there for more than a year. Congress just passed a bill that makes taxpayers liable to pay a portion of their earnings from Puerto Rican subsidiaries.
Other elements that beg to be addressed are whether gains made in the period prior to residency in Puerto Rico could be retroactively taxed by the IRS. And if they are not taxed, do they still need to be reported?
What’s more is that even as the Puerto Rican government supports the emergence of cryptocurrencies in their economy, would taxation become a feature in years following its open acceptance of virtual currencies?
Standard of living perspective
Even as the newly-wealthy make exodus-style movements towards a tax-friendlier land, what standard of living is available to these individuals? Puerto Rico’s sun-kissed beaches and pure shores are attractive but what lies on the dark side of the country, when you’re not there to vacation.
Presently, only 60% of civilians have access to proper electricity. Just days ago, another massive blackout hit Puerto Rico marking further damage to the country’s basic infrastructure, not including the carnage left behind by two successive hurricanes.
Another Massive Blackout Struck Puerto Rico Last Night https://t.co/ZpL2w0ww3k
— zerohedge (@zerohedge) February 13, 2018
In the previously quoted New York Times article, Reeve Collins, Co-founder of Tether, said some very true words about cryptocurrencies, “This is the first time in human history anyone other than kings or governments or gods can create their own money.”
Seeing as how this wealth was not derived from a pre-existing government system or via the established economy, what rights would a government have to tax income that is not inherently theirs?
Whilst that represents one side of the argument, another pro-taxation argument could be that even cryptocurrency holders partake in the use of government-enabled benefits like public education, street lighting, well-maintained roads and phone lines a.k.a. infrastructure.
And so does the shared benefit and use of these resources mandate remuneration to the government for further upkeep and maintenance?
In spite of the debate and furor over tax payments on digital currencies, all signs appear to be pointing in the direction of “pay your taxes and stay out of trouble”.
Even if you stand to lose a huge chunk of your earnings, what do you stand to gain in terms of penalties, fees or worse, incarceration? Tax lawyers, accountants and scores of professional opinions recommend the tried and true path – pay your taxes.
However, even as they make these recommendations, cryptocurrencies do present a new challenge for the pre-existing taxation system and lobbying for new rights, bills and tax reforms to be passed in favour of the cryptocurrency holder is something worth considering. This would be in conjunction with the general move towards greater technological literacy as a race.
Some American states like Arizona are exactly on this path (with House of Senate just passing the bill for taxes to be paid in bitcoin) and could potentially be further pioneers for greater acceptance of those with cryptocurrencies, lowering taxable dues on capital gains from virtual currencies.