The Hyperbitcoinization of Bitcoin and the Future of Taxes

It was late November 2019 and I had just won a TechStars contest at Nipsey Hussle’s Vector90 in Los Angeles. I was excited to win, but I was even more excited that I had passed my ethics exam, the final step before applying to become a CPA. Thirty minutes before the post office closed, I arrived to submit my official application with a $50 application fee. The postal clerk swiped my card, and to my horror she empathetically said, “I’m sorry, this card has been declined. You should call your bank.”

I checked my bank phone app and saw that the balance was over the total cost of the money order. There must have been a mistake – what could happen? My mind raced as I thought about what could be causing this problem. I called the bank and they informed me that they had closed my account without my knowledge and that I would receive a check within 10 to 14 business days.

When I asked her why my account was closed, she said she couldn’t tell me. I never found out why. This put me in a very strange situation. When was I finally going to become a CPA? The joy of winning TechStars was over.

I then realized that the value of bitcoin was not in US dollar amounts, but in the decentralized utility. Bitcoin enables transactions without intermediaries, for a low cost and quickly. Not having an intermediary, such as a bank or government, prevents accounts from being closed – like what happened to me – as the technology allows everyone, including the unbanked and underbanked, to participate.

What is hyperbitcoinization?

Hyperbitcoinization is defined as the moment when bitcoin becomes the world’s dominant form of money. People will value bitcoin more than fiat currency or precious metals when this happens. This can occur if there is a monetary crisis caused by central bank policy or because people will increasingly use bitcoin as a payment system. Still, CPAs will have to learn the ins and outs of digital assets quickly or be left behind, just like those who have yet to adapt to the Internet.

Hyperbitcoinization will have a huge effect on the taxation of virtual currencies across the board and will result in a massive change for businesses worldwide. The Financial Accounting Standards Board has already begun adjusting accounting standards for digital assets such as bitcoin.

As a CPA, I value the technology behind cryptocurrencies, blockchains, which are databases that serve as the ledger for cryptocurrencies. The Bitcoin blockchain is an open source blockchain that allows for decentralized participation in keeping the software trustless. In contrast, blockchain for a central bank digital currency will be controlled by a central bank. Bitcoin evangelists see bitcoin as the way to escape a currency controlled by the government. Whether the government or the people, blockchains are changing money and the way to account for it.

FASB and digital assets

As digital assets grow in popularity, there needs to be more guidance from regulatory bodies. The
The FASB regards digital assets as intangible assets accounted for using the historical cost method. The FASB’s primary purpose is to establish and improve generally accepted accounting principles in the United States in the public interest. At a FASB board meeting on 12 October, it was decided to change the accounting of digital assets on the balance sheet from the historical cost method to the measurement of fair value.

This rule change could greatly affect the use of digital assets, especially bitcoin. Using the historical cost method, CEOs were barred from adding digital assets to the balance sheet. If the asset price increased, they could show no profit on the income statement; but if the price went down, they were forced to take a loss in value. The fair value method will include both gains and losses in the accounts.

A company’s goal is to make a profit for its shareholders. If the company takes a loss with no possibility of profit, the CEO and other decision-makers can be dismissed. Why take that risk if you are a decision maker? More importantly, the historical cost can drastically undervalue a company investing in digital assets if those assets increase drastically.

IRS and digital assets

The IRS collects federal taxes and enforces the Internal Revenue Code. In recent years, the tax authorities have increased their attention to digital assets, and the rules are constantly evolving.

In March 2014, the IRS issued Publication Notice 14–21 stating that “virtual currency is treated as property” and “is not treated as currency.” Although the IRS did not address virtual currencies again for five years, the 2017 Tax Cuts and Jobs Act drastically affected investors. Using similar exchanges for virtual currencies was no longer allowed, and loss of assets could no longer be deducted as a loss.

In 2019, the IRS issued Revenue Ruling 19–24, which clarified specific topics such as airdrops and forks. In 2019, according to Schedule 1 of the 1040 personal income tax returns, the agency added the question: “Did you receive, sell, send, exchange, or otherwise acquire any financial interest in a virtual currency at any time during 2019?” This question, slightly adjusted, has since been moved to the front of the 1040 for tax years 2020 and 2021. There is talk that a 1099-DA form may be required from exchanges to provide investors.

The future

A CBDC is a digital asset that a central bank issues. On September 16, the White House released the framework for a US CBDC. A CBDC can automate and simplify the tax process. All transactions would be controlled by a central entity and, in theory, taxes could be automatically taken from individual transfers instead of an annual tax return.

With a US CBDC looming, the use of bitcoin increasing, and regulations becoming more apparent, businesses, governments and CPAs will need to adjust accordingly. Only time will tell how hyperbitcoinization will affect taxation and business practices, but this event will significantly affect our future.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author information

Charles J. Kelly, CPA is an entrepreneur-focused CPA with a focus on cryptocurrency and educating the general public. You can follow him on Twitter at @cjthesmartguy.

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