Making Crypto Tax Free

Basic tax rules for convertible virtual currencies

Buying and selling of crypto is a taxable transaction. The tax authorities here in US call them “convertible virtual currencies.” “Convertibility” is the use in real world transactions to buy or sell goods or services or exchange for fiat currencies. Crypto is taxed on par with property transactions. Fair enough.

Is it then possible to create a cryptocurrency that will not be taxed as property but can be used to exchange goods and services among the participants? It might be.

If certain rules are followed, we could probably carve out a “coin” which can be a medium of exchange for goods and services and no tax would be due...

Making it nontaxable

Oh, no, don’t report me to the tax authorities just yet. Let’s call it a theoretical construct with some possible practical implications.

First off, let’s get back to basics and ditch the word “coin.” Crypto is nothing else but a trusted repository of records of various transactions. The main reason why it is called a “coin” is for ease of understanding: we are all very familiar with what coins do. Let’s instead call that ledger a record book. "Crypto-record-book?” Think of this as a book of records of various exchange transactions between individual members of a particular imaginary network, The Record Book Crypto Network (RBCN), a platform.

Next, let’s consider some fundamental rules of tax. Barter. Is it taxable? Yes, it is in certain cases and no, it is not in some other. Would it be possible for us to artificially limit the exchanges on RBCN to those barter transactions that would not be taxable? If that can be done technically, then we can have a network within which all the goods and services exchanges are tax free. It is likely that the participants of that crypto network would be happy to use that network in those instances when they can and thus avoid paying tax as providers or consumers of various goods and services. The users may be very happy to see such a network created.

Nontaxable barter inside a community

The devil is in the details very much, and it is not quite clear whether this can be pulled off, but if it can, this could be awesome.

Below are some key conditions, where barter was not a taxable transaction, as formally approved by the tax authorities in the US. Please, beware that those conditions may not be the only ones necessary under certain circumstances. On the other hand, some of these conditions could be relaxed. Below is what I have compiled from the two well known cases where barter transactions were approved to be tax free based on specific facts and circumstances. One case was considered in 1996, the other in 2007 (only ten years ago! that is recent in the realm of tax rules and regulations).

1. All services are valued equally under the program: one hour of service equals one good neighbor point.
2. Services provided are primarily domestic or personal in nature. Participants in the program commonly provide services such as housekeeping, babysitting, gardening, errand running, housecleaning, home maintenance, music lessons, or other personal services, including medical consultations and exams, massage, and other holistic treatments. Some members also offer tangible items, tickets, or discounts from menu items at certain restaurants.
3. Members who are self-employed cannot use points to obtain services for their businesses.
4. The definition of a member of the program is a participant who has completed the application, interview, orientation, and reference check process.
5. No fees were charged for participating in the program.
6. There was no guarantee that members would receive services for accumulated points: a member who has performed services does not thereby have a contractual right to receive any services.
7. Exchanges were done on an “informal” “non-commercial” basis. The informal nature of the transactions was evident by the fact that intermediary only connected the two parties together and it was up to those parties to determine whether any services will be performed, to determine the time and place for performance of the services, and to ensure that the services are satisfactorily performed. Also, either member could contact the intermediary to report the hours. Such reports could be made on a postcard or a phone call.
8. In one case, members could not transfer points or sell points except that members may donate points to other members in the member's immediate family or household. In the other, newer, case, the members were able to donate points to other members.
9. No limits were placed on when the services can be received.
10. Both were community organizations, members of which live in a certain area.
11. Many members participants of the networks were motivated by the desire to serve their community and never received any services in exchange, there were 25% of such members in one instance. The purpose of the network is to strengthen relationships between neighbors and members of the community based on reciprocity and equality. The credits serve merely as a means to motivate the volunteers to continue their community service.

Possible recipe

As long as it is done informally, on a non-commercial basis, locally (within a local geographical area, which could probably be a city or neighborhood or individual building, perhaps, that’s not clear), and services or items are personal in nature, then it sounds like there could be an electronic record book out there which could keep the records on behalf of the participants and participation will not incur any tax liability.

There would not be a specific fiat or crypto currency value for a particular unit of measure for the services provided or goods exchanged. Otherwise, this will not work as a nontaxable exchange. By getting these community goodwill records, an individual simply hopes and trusts that the community will repay in kind later, there cannot be any enforceable obligation that accumulated points could be used.

Euphoria

If this works out, it may bring communities closer together in a beautiful way. The crypto technology can then not only enable fast transactions across the globe but also make certain transactions with the members of a local community possible. It can serve not only to record the transactions but also be a market place indicating the need for and availability of goods and services. We will finally get to know our neighbors.

Examples are abound: help with shopping, fixing things, trading away extra items in home that one does not use, babysitting, giving a ride, helping with personal budgets, lots and lots. Most of those interactions may not have ever happened unless members of the same community knew to offer their skills and availability and in exchange could expect help when they might need it in turn. Since the ledger is there forever, the community records could be safely preserved until that individual needs the goods or help that the community has to offer. An additional exchange in goods and services takes place which otherwise would not have. This will improve efficiency and a win-win situation for the people and the government, especially in the times of aging population when many people chose to stay at home and need an extra help to live comfortably.

Should we then give it an even longer name: Community Crypto Record Book (CCRB)?

Names are a fun part about the cryptosphere. One can dream them up endlessly. I especially like it when the projects keep on changing their names and their coin names. It makes things look so much less formal and that much closer to the notion of the community where we all explore and invent.

Sobriety

All is good except that for now the tax law is such that every crypto is a property that can be bought and sold and such transactions are taxable. Could something be constructed which will use the technology but will not be quite a “convertible virtual currency?”

It is probably possible either now or in the future, we might even get some help from the tax authorities.

That’s just a thought, don’t give me up just yet.

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