The Canadian Revenue Agency (CRA) asked Toronto’s Coinsquare coin exchange for the identity of each of its customers. The request was filed in a September filing with the Canadian federal court on the grounds that it needs the information to verify that Coinsquare customers are complying with their tax obligations.
It is not the first time a request like this has been made, although perhaps it is the first time that a regulator like the CRA has made one with such a broad scope. Coinbase was ordered by a federal court to hand over a list of all customers who had transacted more than $ 20,000 or more over a two-year period, for example.
The sweeping demand will alert many who have mistaken the lack of enforcement for legality, but it was entirely predictable given the typical aggressiveness with which people like the IRS are known to pursue foregone tax revenue. With a largely apathetic approach to self-regulation, the digital asset and blockchain industry will see regulators flex already established powers in their direction.
Tax evasion has been one of the many illegitimate uses of digital asset exchanges and the cause of much regulatory dismay. It is a criminal offense and regulators have been active in their attempts to prevent digital assets from being used to avoid paying taxes. Her Majesty’s Revenue and Customs (HMRC) in the UK announced a £ 100,000 contract to develop a tool that would help it track digital assets, noting that most digital asset transactions are “taxable business” , while the US IRS has been outspoken about lost revenue due to illegal tax evasion: “The IRS is expanding efforts involving virtual currency, including greater use of analytics,” according to the Commissioner Chuck Rettig.
It demonstrates that lack of enforcement is not a signal that digital assets are tax-free or tax-proof means of tax evasion. Rather, it’s just a case of regulators catching up with the nuances of blockchain technology and digital assets in general. Those who have so far managed to avoid lawsuits over their unpaid taxes or other criminal activities facilitated by blockchain companies have done so only because they have been allowed to fit into a rapidly shrinking regulatory blind spot.
The irony is that Bitcoin is already capable of being a fundamental piece of fiscal infrastructure, superior to the status quo in every way. Current tax systems are burdensome: reporting tax can be a long and cumbersome process, as can be a long and cumbersome process for the agency responsible for taxation, involving huge amounts of data processing and reconciliation. Additionally, there is a disconnect between the transaction on which the tax is due (for example, a simple purchase of customer-seller goods) and what is ultimately reported and verified by the government. This leaves plenty of room for transactions to be reported incorrectly or not at all (intentionally or unintentionally).
With blockchain as a transaction ledger, the gap between transactions and the tax collector can be non-existent. The process of analyzing, reporting and paying for a taxable event can be integrated into the blockchain and applied instantly to any transaction between two individuals. Anything that needs to happen from the point of sale right up to the tax being paid and registered by the government can happen on the blockchain in accordance with the relevant tax rules and, most importantly, it can leave a flawless record of the tax that was applied and which transaction it applies . As long as the infrastructure that supports it can handle the required throughput on a large scale (with the Bitcoin SV blockchain, it can), this can provide a complete and accurate fiscal record far superior to the paper-based systems in use today. In addition, any discrepancies that exist as a result of transactions that for any reason were not detected by the tax process will stand out and require explanations.
It will be bad news for those who make tax evasion facilitation – and worse – their business model. Think of the millions of commissions that exchanges and tumblers earn from moving assets as part of tax evasion schemes that will disappear as governments and regulators begin to see blockchain for the core part of the regulatory infrastructure it is capable of being. . In turn, this is good news for the rest of us and for the adoption of digital assets and blockchain technology in general.
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