Crypt- currency taxation system is a system meant to help the IRS in Financial transaction in an online platform has taken a new direction since the introduction of the crypto currency. Traders and cartels have found a new way of transforming financial assets using strong cryptography to control subtraction and addition of units in asset transfer. This anonymous way does not leave behind prove of ownership and record references hence it is impractical to trace. Therefore it is very hard for someone’s income in crypto-currency format to be traced.
With it being an online thing, it has no geographical limited hence no specific government or legal binds can confine it under a specific rule. This implies that crypto-currencies can at some point be categorized as no currency units hence there is no way the can be taxed. Therefore this research work will try and identify ways in which governments can be able to trace and collected revenue from crypto-currencies transactions.
Failure to this the future of taxation will be at stake. Governments will have collected nothing or very little from its citizens. As we know the taxation relays on the compliance of the taxed. Also it is wise to consider that the compliance by the taxed must be meaningful otherwise nothing substantial will be obtained. Therefore this work tries to identify ways in which the government can make crypto-currency users compliance to taxation. One of the ways proposed is legalizing crypto-currency and making it a method of paying or collecting taxes.
Also governments can consider preaching and sensitizing on willing full complies by user of the same. Finally a government should be able to convince her citizen beyond reasonable doubts that without taxation it is powerless. The work below therefore digs dipper into the above solution.
Crypto-currency is defined as a virtual coinage system that enables its users to perform virtual payments as if they are using a fiat currency (Mittal, 2012). . It uses public and private key for transfer between traders and cryptography is use to secure it and prevent anti-counterfeiting. It is free from the controls of an authority. It uses public and private key for transfer between traders and cryptography is use to secure it and prevent anti-counterfeiting.
The currency is built on the basis of transferring digital content obtained through cryptographic techniques ensuring uniqueness and legitimacy. Crypto-currency growth rate since its birth has been scary. The first from of crypto-currency was Bitcoin release in January 2009 and since then more than 400 versions of crypto-currency have been developed and leased to the public domain and most of them have reported a great success. [image: ]Figure 1: A list of some of the available crypto-currency coins
In other words we can refer to crypto-currency as a form of a digital coin that that has been decentralized and has been freed from government powers. Since there are no regulations governing it, individuals conduct their business transactions through a peer to peer network (Zimmer, 2017).
Bitcoin is the most known and used form of crypto-currency. It operates under the blockchain technology where owners can only transact on public ledger. Bearing in mind there is no government regulations, the coin operates in under the supply demand logic to create a considerable value. The standards and rules behind the coin are geared towards solving the double spending issues hence at the same time compiled to face trust issues. Like any other form of currency bitcoin can be stolen, destroyed or get lost (Chain & Wen, 2015). Like any other commodity the factors that influence increases in the price of a commodity also are the same factors that cause increase in price of the digital coins (Kim, Ferrin & Rao, 2009). They include: market influencers- these are the people with immunity to competition hence the dictate the price of a commodity. Secondly we have the fluctuation in demand and supply of the commodity and finally the asset market. Figure 1 below shows how bitcon has been fluctuating in price since 2013.
From the above we can attest that all the factors affecting a common business can also affect the bitcoin business. The main question we ask our self is, what can the governments control the usage of crypto-currency?
Crypto-currency by itself has gained power beyond a controllable measure over the past few years. As medium of exchange it has been praised all over the world despite the fact that it has not received enough support by the governments and the world at large. Though it has been able to store value like gold or any other strong mineral it faces a lot of threats and pressure because it is ungoverned and operates under no authority. Nevertheless different countries have started accepting either as a currency or as a property. The figure below describes further (Figure 4).
Farell 2015 in their study on the acceptance of crypto- currency as a medium of exchange, laments to much about it volatile nature. How then will its related transaction be taxed? Despite that the fact that there is a strong dispute between categorizing it as an asset or a currency there is need for it to be taxed either way. Taxation is a must but with the nature of the above it is complex. Reason for complexity includes hidden launches and transactions that take place without the consent of the IRS ( Matonis, 2013). Crypto-currency is also venerable to manipulation hence even the government cannot trace the operation without the users consent like in the case of fiat currency (Hafner, 2018).
It has been found that most of the crypt currency traders do not paying taxes. Some of the major reasons sites are luck of the required knowledge on how to go about it. Secondly, crypto-currency users are faced by integrity issues in they pretend to be okay yet they a running way from taxes. Others are not paying because they don’t know if they are supposed to. Others don’t pay at all. This is where our the programs intervenes to help people understand what they a supposed to do hence stop robing the government.
The main purpose of this study is to help both users and the IRS in the taxation process of crypto-currency transactions. This will therefore help in repainting the bad image painted on them associating them with illicit activity. With our focus being on taxation, the aim is to define ways that will help the government embrace the above technological advancement and capitalize on its usage. In other words, this work will try to identify ways in which governments can be able to trace and collected revenue from crypto-currencies transactions. Failure to this the future of taxation will be at stake. Governments will have collected nothing or very little from its citizens. As we know the taxation depends on the compliance of the taxed. Therefore it is important to make sure that the taxed is convinced and ready to fully comply. Also it is wise to consider that the compliance by the taxed must be meaningful otherwise nothing substantial will be obtained.
We all know that any government depend the revenue collected from its people. The revenues collected are traced through banks and companies. But bitcons or most of the crypto-currencies do not need a bank account to operate neither do they rely on banking systems for management. They operate in a cyberspace and obtained through mining and an assignment from complex algorithms. Their transfer does not require any intermediary. Therefore if widely adopted they the banking systems will lack relevance hence the government also will not have ways to trace claim. Secondly, crypto-currency offers untraceable financial transactions globally provided there is internet connectivity. This means that persons in business can transact without geographical limits and also keep it as a secret no matter how big the transaction can be. Tax evasion here works very well because there is no way of pining down the amount of money one has earned when thing are done using the digital currency. For this reason we can simply tell that the digital currency plays a big role in propagation of such crimes. What can we do for use to enjoy the benefits brought about by the cryptography technology and at and at the same time eliminate illicit activities? In the next chapter we are going to look at some of the solution to this.
Crypto- currency- a digital currency generated from cryptographic techniques. It uses public and private key for transfer between traders and cryptography is use to secure it and prevent anti-counterfeiting.
Fiat Currency- It a legal tender used to trade and backed by a government.
Taxation- It’s a levy imposed to the individuals leaving, employed, and operating a business in country by the government form it to generate income that supports its operational activities.
Encryption- It is a technique of encoding information in way such that only the allowed users can view and access it.
Crypto-currency and taxes has been a burning topic since the emergency of the technology. The Internal revenue services has being willing and putting efforts to ensure that bitcoin related transactions have been taxed. Whether bitcoin is treated as a currency or an asset the facts remains that it should taxed. The IRS has made efforts to make sure that individual dealing with any form of revenue creating activities presents themselves to them. They tend to be lenient in case a taxpayer directly approaches them on their accord than a situation of where they discover by themselves which mostly translates into a crime ( Szczerbowski, 2018). According to IRS few people have been reporting their gains on crypto business butt still they feel that more are hiding or going unnoticed over the same. It is also clear that there is little guidance to taxpayers on the issues of crypto transactions. If all crypto traders would consider using a fiat currency to trade then it could have been easer but now the use crypto currency to trade which increases complication (Vitt, 2013).
The government of Japan through her National Taxation Agency has also developed ways to ensure that there no individuals who can evade taxes from crypto-currency gains. The new system is under review and testing hence it has not been release for the public to use till March 2019 (Say, 2018). Therefore it is good to have a way of bring crypto taxpayers to self-identification and pay taxes. Also it is wise to consider that the compliance by the taxed must be meaningful otherwise nothing substantial will be obtained. The proposed system will help the government tax crypto-currency gains with a little more ease than before and also improve compliance to taxation.
The proposed system is a digital web portal that will allow agents to submit 1099 form provided by the tax payers then the system computes the amount of tax accrued from the presented crypto-currency transaction. This implies that it will be a mandatory for mining farms and exchange platform to server client with the 1099 forms or any other type of a document that shows the gains on the crypto-currency transactions Figure 3 below show an example.
Then agents will be hired to ensure that the provided details are legit and feeding of information in the system is done is a good way to prevent errors. They will be also work hand in hand with IRS to sensitize individuals to comply and present themselves willing to pay taxes. The systems will automatically compute the gains and provide automatic calculations of the taxes. Because crypto currency is global and operates without geographical limits enforcing KYC measure will help a lot in ensuring that IRS are able to fetch data of its own users without much straggle. We also know that taxation varies depending on the type of tax you are paying, that is either as an individual or as an business. In this case the systesm will provide a mechanism to register
The above project is aimed at providing the IRS with automated systems that has the capability of automatically calculating the gains from crypto currency transactions. The focus in the above study is to come up with a way of implementation taxation of crypto-currency gains within the country. But because it’s a global thing and does not have geographical limits, enforcing KYC terms will also assist in covering a wider range of target customers all over the world Therefore the first implementation of the systems will take place at the IRS departments to enable them test use and training agents then unlashing it to the public.
The above is computer software so there will be need for a computational environment which will be made up of: