Paul L. Caron

Thursday, May 12, 2022

Parsons: Cryptocurrency, Legibility, And Taxation

Amanda Parsons (Academic Fellow, Columbia; moving to Colorado), Cryptocurrency, Legibility, and Taxation:

In Jarrett v. United States, a taxpayer in Tennessee is arguing that staking cryptocurrency did not result in him earning “income” under federal income tax law. This case illustrates the fundamental challenge that cryptocurrency and blockchain technology present for tax law. Wealth creation in the crypto space is not readily legible to the state. This absence of legibility threatens tax law’s reliance on placing economic activities into categories to determine how they should be taxed. Furthermore, this case highlights the harms Congress and Treasury are risking by not taking action on cryptocurrency taxation. The uncertainty and lack of guidance on the appropriate taxation of cryptocurrency is opening the door for a critical juncture in tax law to be decided via strategic litigation. This threatens a jurisprudential evasion of the democratic and administrative process in a high-stakes moment for tax law.

Strategic litigation by industry advocates is not the appropriate path forward for the taxation of cryptocurrency and blockchain. Allowing the federal judiciary to create piecemeal a system for taxing cryptocurrency will lead to a scattered, incoherent taxing scheme with unintended ramifications. But courts will be the ones making these decisions if Congress and the Biden Administration do not act quickly. It was disappointing that the Biden Administration’s recent executive order on the responsible development of digital assets did not call for an assessment of the appropriate tax treatment of cryptocurrency and blockchain activities.

The United States has, thus far, not responded quickly enough to the economic upheavals that have been brought about by the digital economy and their impact on taxation. Amazon did not begin collecting sales tax nationwide until 2017, and the Supreme Court only confirmed that states may charge sales tax from remote sales in 2018. Antiquated international tax laws inappropriate for a digital economy have been allowed to persist for decades, allowing global companies to conduct extensive business activities in countries without ever paying taxes there. Almost three decades into the digital revolution, comprehensive international reforms are finally being pursued following global uproar over digital companies not paying their fair share of taxes. 

Whether cryptocurrency and blockchain will revolution the global economy in the way that Web 2.0 and other technological advances have done remains to be seen. But Congress and the Treasury need to be responsive. With more than 10,000 cryptocurrencies circulating and billions of dollars potentially at stake, many more Jarretts are to come.

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