taxation

New tax rules could mean a US exodus for crypto companies

A change to R&D tax rules means that a tech company could lose more than $1 million — but still be on the hook for hundreds of thousands in taxes.

All eyes are on the implosion of crypto banking and bank runs. Unfortunately, there is another poison that will destroy the tech industry — and it’s already eating at the core of newly successful startups. That poison is a change to research and development (R&D) credit rules under section 174. The change passed as part of the 2017 Tax Cuts and Jobs Act but was deferred until 2023 — triggering massive tax bills for already cashflow-strapped companies.

The new R&D law has overly broad language that states “any and all” software development must be amortized over five years if the development took place in the United States, or over 15 years if the work was done overseas. The change doesn’t sound so bad on its surface; some argue it might even create more tech jobs in the U.S.

But that isn’t how it will play out. Many countries have better R&D credits than the U.S. Much of U.S. software development will shift to countries such as the United Kingdom, where the rules are simpler and more lucrative. For tax-smart companies, U.S. entities will just be for marketing and sales.

Imagine a company that lost over a million dollars but owes over $300,000 in taxes! How is this possible? This hypothetical company has roughly $2.5 million in income and, in 2022, spent $1.5 million building its software and $1 million in other costs, meaning it had a negative cashflow totaling $1 million dollars. However, because the $1.5 million of development was done by a team in India, it will only see $50,000 from the software development side, leaving a $1,050,000 deduction to offset the $2.5 million of income this year — meaning it owes tax on $1,450,000 in net income, or a bankrupting $304,500 in tax!

*Cryptocurrency tax rates in select countries as of 2023*

Proponents of this tax say companies will still receive all the benefits of the deduction — just over many years. Put one of these proponents in front of a company that lost a million on operations but owes $300,000 in taxes and see if they say the same thing. Cashflow is king for finding startup success, and these types of R&D costs have been deducted nearly as long as the United States has had an income tax because of how vitally important innovation is to fueling national growth. With the current climate of high-interest rates and increased regulation, this law change will kill the most creative development in the U.S. on future-thinking technologies, such as AI and blockchain.

Some of the Big Tech layoffs taking place may be a result of this rule change. No surprise: It makes more sense to restructure so that subsidiaries outside the U.S. do R&D. For blockchain, crypto, and nonfungible token (NFT) companies that already have to deal with all the Securities and Exchange Commission scrutiny, it just seems a no-brainer to distance from the U.S. now.

There are so many complications and unanswered questions of how to apply this law that it’s head-spinning. For example, if you use a computer, server, miner, etc., for your R&D that you are depreciating, that portion of depreciation you would be able to take in 2022 must be added to the capitalization bucket to amortize out. This means if you were using this utility in the U.S. and expected to have $50,000 in depreciation come through from that equipment to deduct this year, you would only see $5,000 of that actually affect the bottom line. This really negates the purpose of special depreciation rules that encourage companies to spend on equipment, but then doesn’t actually let them see the deduction.

Another big risk with this law is if you raise money and develop with a big loss and no current income. Initially, this wouldn’t hurt you — but if your company fails, you are in for a world of pain, because the cancellation of debt income from a SAFE note that was not repaid can trigger taxes if there are no net operating loss carryovers to fully offset. And there is no way, currently, to accelerate the R&D amortization; even if a project is abandoned or a company shuts down, the expenditure cannot be taken immediately. That means equity investors may not get back funds they should receive. Instead, the money in the treasury will go to paying taxes for a failed company while founders who received salaries may even be on the hook for the tax liability or repaying investors.

Everyone in government and the tax industry knew these laws were a mess, and they were set to be repealed by a bipartisan supported bill in Congress on Jan. 3. But the effort failed because Democrats wanted to increase the Child Tax Credit — at the last minute — after everything had been agreed, and Republicans wouldn’t go along with it.

Now, it seems we are stuck with this crazy innovation-killing tax law. A repeal proposal has been reintroduced but hasn’t gained much traction. Especially in light of the current fundraising challenges for blockchain companies caused by increased interest rates, the crypto winter, and the Silicon Valley Bank failure, we may see a massive and unnecessary die-off of tech companies, unless some major action is taken by Congress quickly.

Crystal Stranger is a federally-licensed tax EA and the chief operating officer at GBS Tax. She worked previously as a software developer in San Francisco.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Biden’s policy on crypto taxation undermines his environmental goals

We don’t tax houses while they’re under construction, and we shouldn’t impose taxes on cryptocurrency while it’s staked.

Gains accrued by staking cryptocurrency should not be treated as a taxable event. It only makes sense to tax such gains upon their conversion to legal tender currency. To do otherwise undermines a marquee environmental policy from the administration of United States President Joe Biden.

The Internal Revenue Service appears strongly inclined to treat staking gains as immediate income. The penalties for getting sideways with the IRS can be draconian. And taxing, or threatening to tax, staking gains is bad policy — and, ahem, bad politics.

There are many excellent reasons not to treat staking gains in and of themselves as taxable events. The best reason is to put the IRS back in line with White House environmental policy to fight climate change.

If the IRS won’t administratively comply with the Biden administration’s clearly stated marquee policy, it’s time for Congress to clarify the law and prohibit the taxing of unrealized gains.

Deferring gains until sale merely defers receipt of taxes by the Treasury. It doesn’t cost the government even one thin satoshi. So, what’s going on?

Crypto is legitimately subject to taxes in many ways. You’ll pay taxes when you sell your crypto, or even exchange it for other forms of crypto. (Elsewhere, we have called upon Congress to enact a deferral for crypto-to-crypto exchanges, a subject beyond the scope of this article.)

Taxing staking gains is antithetical to a clearly expressed marquee White House policy. It’s also antithetical to generally accepted notions of good tax policy.

Uncle Sam does not tax Jasper Johns while turning a blank canvas into a multimillion-dollar artwork. He is not taxed when he consigns it to a gallery for sale at a posted price. He gets taxed when he is given the million-dollar check for his latest masterpiece.

This obviously makes sense. Uncle Sam won’t take a piece of a painting (or even a fractional interest therein) in payment of taxes. How would an artist be expected to pay the tax on a work-in-progress or a work merely listed for sale? Taxing artworks during their creation would be ridiculous!

Uncle Sam does not tax a building contractor while building a home, nor even when he turns it over to a realtor for sale. The IRS collects taxes upon sale.

This obviously makes sense. One can only guess at an asset’s value until it’s sold, and even then, one doesn’t have the cash to pay the taxes until sale proceeds are received. Moreover, the IRS doesn’t “do windows” — or take lumber or any other in-kind payment of taxes. Taxing housing under construction would be preposterous!

Taxing staking gains while they are in process is nonsensical and inconsistent with the treatment of other created assets. The IRS has staked out a real Alice in Wonderland policy on this one. And taxing such gains does Americans, and America, real damage, driving wealth creation and good jobs offshore (against stated presidential policy)!

Yet perhaps the most compelling reason for the IRS to stop taxing staking gains — and, if it does not, for Congress promptly to fix this — is that President Biden has made reducing CO2 emissions a signature administration priority.

The IRS taxing staking gains upon occurrence (rather than upon sale or exchange of those gains) badly undermines two of the administration’s top priorities: onshoring good jobs and fighting climate change. Bureaucracy trumps democracy? Shameful!

Support from Democrats on the Hill for their party’s leader for forbidding taxing staking gains may be assumed. And there are certainly enough sophisticated Republican Congresspersons to pass a law forbidding the taxing of staking gains.

So, what (no pun intended) is at stake? Proof-of-work crypto uses vastly more energy, generating vastly more emissions than proof-of-stake. Per the White House’s Office of Science and Technology fact sheet dated Sept. 8, 2022:

“From 2018 to 2022, annualized electricity usage from global crypto-assets grew rapidly, with estimates of electricity usage doubling to quadrupling. […] Switching to alternative crypto-asset technologies such as Proof of Stake could dramatically reduce overall power usage to less than 1% of today’s levels.”

Taxing those gains before they are realized will also cripple the movement to proof-of-stake.

To summarize, there are intractable practical problems in taxing an asset at its creation. People can only guess the value of an asset until sold. The IRS doesn’t accept payment in kind (were that even possible, as frequently it’s not).

Many taxpayers don’t have the actual cash to pay their taxes until realizing the proceeds of sale. It is cruel and counterproductive to turn honorable citizens into tax cheats and criminals via bad regulation. It will drive crypto, and the attendant jobs and wealth creation, out of the United States. And deferring taxation until sale postpones but does not cost the government any tax revenue.

Most of all, the treatment of staking gains as a taxable event undermines the Biden administration’s stated top priority of onshoring jobs and reducing CO2 emissions.

Stop treating staking gains as a taxable event! If Biden and the IRS turn a deaf ear, Congress should take up the issue.

Todd White is the founder of the American Blockchain PAC. Ralph Benko is senior counselor to the group.

What is fiscal policy, and why does it matter?

Fiscal policy shapes economies through government spending, taxation and borrowing.

Fiscal policy is a tool used by governments to regulate economic activities in their country. It involves the use of government spending, taxation and borrowing to influence economic growth, stabilize inflation and maintain a stable economy. This article will explain what fiscal policy is, how it works, and why it is important.

What is fiscal policy?

Fiscal policy is a tool used by governments to regulate economic activities in their country. It is one of the two main categories of economic policy, along with monetary policy. The main goal of fiscal policy is to control the economy through government spending and taxation.

How does fiscal policy work?

The government has a number of ways to affect the economy through fiscal policy. One of the primary methods used is government spending. The government may boost economic activity and create jobs by raising spending, which will add more money to the economy.

Another way that fiscal policy works is through taxation. The government can boost disposable income, which in turn can boost consumer spending, by decreasing taxes. This could encourage economic expansion and boost activity.

Important old chart of mine.

Fiscal policy created inflation to a much larger extent than QE pic.twitter.com/zeT5jLqwVA

— AndreasStenoLarsen (@AndreasSteno) March 18, 2023

Finally, fiscal policy is also used for controlling inflation. If the government considers inflation to be a concern, it may raise taxes or cut spending, both of which could help to lower demand and limit inflation.

Why is fiscal policy important?

Fiscal policy is important because it can have a significant impact on the economy. By adjusting government spending and taxation, the government can influence economic growth, inflation and employment levels.

Stimulating economic growth

The promotion of economic growth is one of fiscal policy’s main goals. The government can promote economic activity and employment by raising spending. As a result, there may be an increase in tax collections and corporate and individual chances for growth in the economy.

Regulating inflation

Inflation control is another key responsibility of fiscal policy. When there is an excess of money chasing an insufficient amount of goods, inflation can result in price increases. The government can lower demand by altering expenditure and taxation, which can aid in reducing inflation.

Reducing employment

Furthermore, fiscal policy can be used to reduce unemployment. The government can promote economic activity and employment by raising spending. As a result, there may be less unemployment and more options for employment.

Managing debt

Fiscal policy can also be used to manage government debt. By adjusting government spending and taxation, the government can influence the amount of money it borrows. This can help manage the government’s debt levels and ensure that it is able to meet its financial obligations.

➡️ New: Legislature's personal income tax & corporate tax proposals would raise between $1.6 – $2.1 billion:

• Senate & Assembly income tax increase: $710M

• Assembly corporate tax increase: $1.2B for MTA & other transit

• Senate corporate tax MTA surcharge: $930M for MTA pic.twitter.com/zj4gYE319K

— Fiscal Policy Institute (@NYFiscalPolicy) March 16, 2023

Do cryptocurrencies have a fiscal policy?

Due to their decentralization and lack of centralized management, cryptocurrencies do not have a fiscal policy in the conventional sense. Yet the supply and demand of some cryptocurrencies may be impacted by the fact that they may have their own distinct monetary policies and rules written into their code.

For example, Bitcoin (BTC) has a fixed maximum supply of 21 million coins, which is hardcoded into its blockchain protocol. This means that no more than 21 million BTC can ever be created, and this limit helps to regulate its supply and demand.

Even though cryptocurrencies lack a traditional fiscal policy, the rules and protocols incorporated into their coding can nonetheless significantly affect their adoption and value. For instance, alterations to the supply or consensus algorithm of a cryptocurrency may have an impact on its security and scarcity, which may have an impact on its price and market demand.

Magazine: Best and worst countries for crypto taxes — Plus crypto tax tips

Russia’s Central Bank report examines crypto’s place in the financial system

Russia’s Central Bank has released a report on digital assets which looks at how the technology could be integrated into its traditional financial system.

The Central Bank of Russia (CBR) is looking at ways to integrate crypto assets and blockchain technology into its local financial system amid a pile-on of global financial sanctions.

In a Telegram post by the CBR on Nov. 7, the central bank shared a public consultation report titled “Digital Assets in Russian Federation.”

It considers how the sanction-hit state may possibly open up its domestic market to foreign issuers of digital assets — particularly those from “friendly countries.”

Other areas of focus in the report are digital asset regulation, retail investor protections, digital property rights related to smart contracts and tokenization, as well as reformed accounting and taxation proposals.

The CBR stated that it strongly supports the “further development of digital technologies” provided they don’t create “uncontrollable” financial or cybersecurity risks for consumers.

Despite the nascency of blockchain technology, CBR said the same regulatory rules concerning the issuance and circulation of traditional financial instruments should also extend to digital assets.

The CBR said regulation over the short term should focus on protecting investor rights, strengthen rules for admitting a digital asset into circulation, ensuring the issuer is accredited and ensuring the issuer discloses all relevant information to investors.

The Central Bank’s message on Telegram, originally written in Russian, said while the legal framework for digital assets has been created, improved regulation is required for its continued development.

“Russia has created the necessary legal framework for the issuance and circulation of digital assets […] But so far the market is at the initial stage of its development […] and is many times inferior to the market of traditional financial instruments. Its further development requires improved regulation.”

As for smart contract regulation, the central bank acknowledged that a legislative framework was already in effect — however, it proposes that Russian-created smart contracts be independently audited before being deployed.

CBR was also positive about the potential for tokenized off-chain assets. However, the bank noted that legislation would need to be put in place to ensure a “legal connection” exists between the token holder and the token itself.

The report comes as the Russian Ministry of Finance recently approved the use of cryptocurrencies as a cross-border payment method by Russian residents on Sept. 22.

However, the CBR’s 33-page report made no reference to the increase in sanctions that have been imposed on Russia and the crippling effect it has had on its economy — nor did it discuss the Russia-Ukraine War that is currently taking place in Ukraine.

It however mentions a separate report it is working on, which focuses on Russia’s new central bank digital currency (CBDC) — the digital ruble —which is expected to be piloted in early 2023.

In Aug. 2022, The CBR stated that they plan on rolling out the digital ruble to all Russian-based banks in 2024.

Russia’s Central Bank report examines crypto’s place in the financial system

Russia’s central bank has released a report on digital assets which looks at how the technology could be integrated into its traditional financial system.

The Central Bank of Russia (CBR) is looking at ways to integrate crypto assets and blockchain technology into its local financial system amid a pile-on of global financial sanctions.

In a Telegram post by the CBR on Nov. 7, the central bank shared a public consultation report titled “Digital Assets in Russian Federation.”

It considers how the sanction-hit state may possibly open up its domestic market to foreign issuers of digital assets — particularly those from “friendly countries.”

The CBR stated that it strongly supports the “further development of digital technologies” provided they don’t create “uncontrollable” financial or cybersecurity risks for consumers.

Despite the nascency of blockchain technology, CBR said the same regulatory rules concerning the issuance and circulation of traditional financial instruments should also extend to digital assets.

The CBR said regulation over the short term should focus on protecting investor rights, strengthening rules for admitting a digital asset into circulation, ensuring the issuer is accredited and ensuring the issuer discloses all relevant information to investors.

The central bank’s message on Telegram, originally written in Russian, said while the legal framework for digital assets has been created, improved regulation is required for its continued development:

“Russia has created the necessary legal framework for the issuance and circulation of digital assets […] But so far the market is at the initial stage of its development […] and is many times inferior to the market of traditional financial instruments. Its further development requires improved regulation.”

As for smart contract regulation, the central bank acknowledged that a legislative framework was already in effect. However, it proposes that Russian-created smart contracts be independently audited before being deployed.

The report comes as the Russian Ministry of Finance recently approved the use of cryptocurrencies as a cross-border payment method by Russian residents on Sept. 22.

It, however, mentions a separate report it is working on, which focuses on Russia’s new central bank digital currency (CBDC) — the digital ruble —which is expected to be piloted in early 2023.

In Aug. 2022, The CBR stated that they plan on rolling out the digital ruble to all Russian-based banks in 2024.

Before ETH drops further, set some money aside for surprise taxes

Ethereum’s Merge resulted in a Proof-of-Work airdrop. That means you could be on the hook for tokens you didn’t even want.

Ethereum’s Merge dominated the crypto world in September with promises of quicker transaction times, improved security and a 99% reduction in energy consumption. However, will you end up with a surprise tax bill too? Let’s examine.

During the Merge event, the Ethereum mainnet — the then current proof-of-work (PoW) blockchain — merged with the proof-of-stake (PoS) Beacon Chain, marking the end of PoW as the consensus mechanism for the Ethereum blockchain.

On the Beacon Chain, Ethereum joined ranks of other major PoS blockchains such as BNB Chain, Cardano and Solana. Ether (ETH) is the second largest cryptocurrency by market cap after Bitcoin (BTC), and Ethereum is the chain that has spearheaded decentralized finance (DeFi) and nonfungible token (NFT) activity. The Merge heralds ramifications aplenty, but what of the potential tax implications to investors, traders and businesses alike? It’s doubtful anyone will be too pleased with a surprise tax bill — but that is, potentially, exactly what they’ll get.

What are the possible tax implications?

If we take a short trip down memory lane back to Bitcoin’s civil war in 2017, it eventually concluded in a split in the chain into Bitcoin and Bitcoin Cash (BCH). This event was coined — no pun intended — as a hard fork.

In this instance, new BCH coins were issued to BTC holders and, as a result, this gave rise to taxable income at the fair market value upon receipt of BCH for the recipients. Furthermore, if any BCH holders went on to dispose of their coins, any accumulated gains or losses were subject to capital gains tax.

Is a civil war brewing among the Ethereum community due to the Merge? There are certainly rumblings, and it looks as though the PoW consensus could continue to be supported by some Ethereum miners. This potential forked version of Ethereum already has the ticker ETHW, which stands for EthereumPoW — with ETHW continuing with the PoW codebase and ETH forking to the new proof-of-stake chain.

The tax implications depend on where you live — your tax residency.

In the United States, the Internal Revenue Service (IRS) has not issued any specific guidance on the Merge per se. However, for ETH holders who receive an equivalent airdrop of ETHW, this is beyond doubt subject to income tax, just like the BCH in 2017. The IRS does have clear guidance on this.

In the United Kingdom, an airdrop of ETHW is treated differently. According to the guidance, it can be inferred that no income tax is applied upon receipt. HM Revenue and Customs has gone one step further and provided some guidance on what it describes as a one-way transfer — citing the Ethereum mainnet to Beacon Chain upgrade. Its view is that section 43 of the Taxation of Chargeable Gains Act 1992 will apply to this scenario. Simply put, a taxable event subject to capital gains tax was not triggered by the Merge. Instead, the cost basis of your existing ETH is attributed to your ETHW token and any subsequent disposals will accrue a gain or loss as normal.

What about staking and mining?

Investors and traders can stake (and lock in) their ETH and receive rewards. They should take a conservative approach to these rewards, even if tax guidance is unclear.

For U.S. holders, following the Merge, crypto mining and staking are both subject to income tax upon receipt and capital gains tax (CGT) upon disposal. However, staking is a contentious topic and is subject to an ongoing court cas, so this may be set to change in the future as the case proceeds.

In the U.K., ETH staking and mining rewards are generally miscellaneous income (less certain allowable expenses) and subject to income tax upon receipt and CGT on disposal. However, this also depends on the degree of activity, organization, risk and commerciality.

So what are the odds?

In a hard fork, the mainnet blockchain becomes part of the newly merged blockchain. All smart contracts along with previous data move over. An Ethereum hard fork is unlike forks we’ve seen before.

The Merge was a planned upgrade. An ETHW fork most likely lacks the necessary support from exchanges, DeFi protocols and oracles. Just like Bitcoin Cash, ETHW, in my view, will become an insignificant sideshow in the shadow of the prevailing post-Merge PoS chain.

Essentially, this type of fork updates the protocol and is intended to be adopted by all. Moving from ETH (PoW) to ETH 2.0 (PoS), token holders convert ETH on a 1:1 basis for ETH 2.0, and the original ETH gets burned in the process.

Practical advice for investors and traders

Investors and businesses should exercise an ounce of prudence and prepare for this scenario by creating a tax liability provision. You will not want to be in a position where a hard fork occurs, and in the worst-case scenario, the value of your Ether declines significantly post-Merge, inhibiting your ability to raise funds to pay your crypto tax bill. Remember, this can only be paid across to your tax agency in fiat currency.

If ETHW proceeds do not become taxable then it’s a simple case of releasing the tax provision and redeploying those funds elsewhere — perhaps to buy more Ether.

Tony Dhanjal serves as the head of tax strategy at Koinly and is its PR and brand ambassador. He is a qualified accountant and tax professional with more than 20 years of experience spanning across industries within FTSE100 companies and public practice.

Colorado is accepting crypto for tax payments — it could be a mess or a shining example

Colorado is now accepting crypto for tax payments — but if you choose to use that option, it could change the amount you owe.

Colorado is accepting crypto as payment for any taxes owed to the state as of Sept. 1. It was the result of a promise made earlier in the year by Colorado Governor Jared Polis, who has proven his commitment to establishing the state as pro-cryptocurrency.

Colorado isn’t the only U.S. state trying to incentivize cryptocurrency investment within its borders, as legislatures in Arizona, Wyoming and Utah have all previously introduced bills to accept tax payments in the form of digital currencies in varying degrees.

There is much to gain economically for states who embrace blockchain technology and the crypto sector. Savvy governments are beginning to pitch their locale as the next center of the crypto economy, hoping to attract new businesses and intelligent, young, wealthy constituents involved with crypto.

Taxpayers should be warned, however, of the tax consequences of making payments with crypto, as making such a payment is a taxable event that has the potential to further increase the amount of taxes one has to pay.

Let’s hope more states follow Colorado’s lead, but they should also learn from where Colorado’s initiative falls short. If states, in the future, want to find success in accepting crypto as payment, they need to understand the tax dilemma inherent to making payments with crypto and lean into the solution of accepting stablecoins as a means of payment.

The issue with making payments with crypto

The big knock on states accepting taxes paid in crypto is that using crypto to pay state taxes is considered taxable disposal for individuals — making a payment triggers its own income event.

The IRS treats cryptocurrency as property, which means if the price of the crypto you’re using to pay state taxes has appreciated in value over time, you have taxable income equal to how much the price appreciated since you bought it.

It’s important for people to know that paying off their tax bill with crypto will trigger another taxable event for the following tax year.

For example, let’s say that, after calculating your 2022 taxes, you have a tax bill due to your resident state in the amount of $10,000. You pay this with $10,000 in Bitcoin (BTC) by the due date, April 15, 2023. If you bought that Bitcoin for $2,000, you now have triggered an $8,000 gain by disposing of that Bitcoin. You’ll now have to pay tax on your $8,000 gain for the 2023 tax year — solely from paying your taxes with appreciated crypto.

Most people who are invested enough to want to use crypto as their primary payment method very likely have grown their wealth in crypto. These individuals may be hesitant to use their appreciated crypto to pay state taxes in order to avoid the additional tax.

If those who have the ability to pay their taxes in crypto are unlikely to do so, states may find that their initiatives never garner the expected traction. Thus, these programs could end up being more costly than they’re worth.

How states can make paying taxes in cryptocurrency viable

Currently, the only way to pay your Colorado state taxes in crypto is via PayPal’s “Cryptocurrencies Hub,” which does not include stablecoins as a means of payment. If states decide to accept stablecoins as a means of payment, there is potential that paying with crypto will find success across the nation.

Cryptocurrency tokens pegged to the price of the United States dollar remove tax from the conversation when using crypto to make payments. Although disposing of these stablecoins still needs to be reported on your tax return, stablecoins do not fluctuate materially in value.

Any gain or loss would likely be zero or only a few dollars at most and would not significantly impact how much taxes you pay.

Of course, converting any Bitcoin or any other cryptocurrency to a stablecoin is a taxable transaction in itself. Still, it’s very likely that, as the crypto ecosystem matures, it will be common for crypto natives to hold a more significant percentage of stablecoins in their overall portfolio.

These crypto natives are looking to cryptocurrencies and decentralized finance as an alternative to the banking system. It’s realistic that, in this alternative system, people will hold a certain amount of liquid assets with which to make payments, including their state tax payments.

When stablecoins are used and no tax bill is involved, paying state taxes with cryptocurrency would no longer be disincentivized by our tax system, and these programs may begin getting the traction they deserve. Many people may decide that the best way to make their tax payments is through crypto.

These states have a lot to gain — if accepting crypto, especially stablecoins, for tax payments is implemented correctly and is successful, states have an opportunity to grow into centers for crypto commerce, all while bringing in additional revenue from a growing economic sector.

Will Colorado and other states find success in accepting crypto tax payments? Or will the tax consequences and crypto being in the midst of a bear market stomp out all potential enthusiasm for such government initiatives?

Let’s root for these states and hope they plan to accept stablecoins. Blockchain technology has the potential to play a significant role in how our governments function in the future. Before our local governments can secure our elections through blockchain, they first have to dip their toes in the water and succeed in accepting tax payments in crypto.

Miles Brooks is a certified public accountant (CPA) and the director of tax strategy at CoinLedger, a crypto-tax software provider.

Get ready for a swarm of incompetent IRS agents in 2023

The IRS is hiring 87,000 agents, thanks to President Joe Biden’s 2021 infrastructure package, but they won’t be fully trained for three years.

The Internal Revenue Service is hiring 87,000 new agents, but taxpayers will not feel the pain for another two to three years. That’s how long it will take the agency to hire and train agents. Few have discussed the extent of this pain. Still, it’s something to think about when you consider the majority of coming audits will be conducted by new agents, many of whom will have been hastily hired and operating with minimal supervision.

Playing the audit lottery will not be smart in future tax years. Taxpayers should protect themselves now, especially when profiting from statutory gray areas — such as cryptocurrency staking, investing through decentralized autonomous organizations (DAOs) and other decentralized finance (DeFi) products.

When I started my career in the mid-2000s, business audits were standard, and the new agents were always the worst with which to deal. You had to explain everything in detail to them like little children, and they still would write up non-factual summaries or incorrect legal opinions. That required escalating cases for a manager to review or file an appeal. New agents were also often uber-aggressive, fighting over small changes to build a reputation for always having major tax increases in the audits they took on.

Don’t get me wrong. The IRS needs to hire agents. The situation for the last few years has been nothing short of a nightmare. Good luck reaching an agent to resolve a tax issue! In 2021, the IRS received 282 million telephone calls. Customer service representatives only answered 32 million, or 11 percent, of those calls. The IRS certainly needs to hire more staff to answer phones and resolve issues within a reasonable time.

The trouble at the IRS dates back to 2011, when major budgetary cuts led to a hiring freeze across the board. The total number of workers at the IRS has fallen massively, from 94,711 agents in 2010 to 78,661 full-time equivalent employees in 2021. This means that adding 87,000 revenue agents will more than double the size of the current IRS!

Add to this the roughly 20,000 agents eligible to retire at the IRS right now, and the IRS will need to hire more than 107,000 agents in the next few years. Thus, two out of three IRS employees will be total newbies in three years. In a perfect world, this could lead to a startup-like culture at the IRS, with innovations and a culture of making a difference. Yeah, right. This is the government. They won’t run things efficiently. And these agents who are tracked on their performance will go for the low-hanging fruit with taxpayers they can bully into big changes on examination, meaning a big increase in small business and individual audits.

*Sources of federal tax revenue in billions, 2000-2021. Source: Cato Institute*

However, we won’t see much of an increase in audits for a couple of years. It will take a while for the IRS to find enough hires though to fill all those seats. The hiring freeze was lifted in 2019, but because of the pandemic, actual net hiring has not yet occurred. In 2021, the IRS lost 14,500 employees due to retirement or separation but gained only 12,500 external hires.

This failure in hiring wasn’t from a lack of trying. In 2021, I was inundated with Facebook ads and recruiter messages, but they still couldn’t even hire enough agents to fill the seats of those who were retiring. So one certainly has to ask, how will they find over 100,000 new agents? And will their hiring standards drop substantially to get enough warm bodies in chairs?

Then it will take even more time before we see these agents in the field. Once a revenue agent is hired, there is another one to two years of training before they are unleashed on the public.

The most likely agent you will meet, a “Small Business/Self-Employed Revenue Agent in Field Examination,” requires 1,888 hours of training. At 40 hours per week, this amounts to 47.2 weeks, which is almost a year after vacation and personal time. A “Special Agent for Criminal Investigations” requires 3,904 hours of training, or closer to two years, to get up to speed. Even a “Customer Service Representative” needs 1,500 hours of training, or more than nine months — to answer the phone lines!

While the IRS has been dwindling in size and struggling to replace retiring agents, the tax laws and technology-based financial transactions have become increasingly complex. The Tax Cuts and Jobs Act (TCJA) in 2017 was the first major overhaul of the tax system since the Tax Reform Act of 1986. Five years after passing the TCJA, not all the provisions have been implemented yet. Who knows what strange memos might start coming out in these not-yet-interpreted areas? Then there are all the gray areas created by different types of cryptocurrency transactions, staking, DAOs and DeFi, with many unique fact patterns for which the relevant laws have yet to be interpreted by the tax courts.

The antiquated IRS computer system further adds to the challenges faced. The IRS still runs on a mainframe computer system from the 1960s that is coded in Cobol. Few current programmers know Cobol, and the IRS has struggled to modify its systems. During the pandemic, a revenue agent admitted to me on a call that the IRS did not have the code to pause the system that mails out automated delinquency notices to taxpayers.

For the last 20 years, the U.S. Treasury has been spending billions a year to develop a new tax computer system, but there never seems to be a clear timeline of when this system will be released. It always seems about five years out with the ever-floating deadline. Because of this lack of decent computer systems, a lot of tasks at the IRS are still performed manually. The IRS has about 60 case management systems that are not interconnected; each function’s employees must transcribe or import information from other electronic systems and mail or fax it to other departments.

Despite all these challenges, the IRS is already signaling that they intend to start doing substantial business audits in future years. It has been years since the Coinbase John Doe summons, and the IRS still has not done the expected bulk audits, so with staffing increases, these will probably start increasing.

Since the pandemic, transfer pricing audits have ground to a halt but will surely pick up again soon — and I expect many crypto businesses to be the target of these audits as well, especially those in DeFi with cross-border lending transactions. And then for R&D, the IRS has issued two memos in the last year requiring full due diligence and documentation to be done before preparing the tax return, but the R&D credit mills predatorily targeting startups have yet to change their business practices, so I expect to see audits of R&D credits en masse once enough agents are ready.

Most of the tax accountants I worked with early in my career have long since retired. The new generation of so-called “experts” didn’t get this business audit experience in their early careers and are utterly unprepared for what is on the horizon at the IRS. Because of this, there is a lot of incorrect information floating around in the tax world. Many advisors who have been playing the audit lottery for years successfully are in line to get both themselves and their clients burned in the coming audit storm.

When should taxpayers be afraid? Considering the two- to three-year timeline to get staffed and the three-year statute of limitations for auditing most tax returns, the tax years that will be most at risk for audit are 2021 and onwards. Per 2019 IRS statistics, individuals with taxable income between $25,000 and $500,000 only have a roughly 0.2% chance of being audited each year, with those reporting $0 income or a net loss for the year at 1.1%.

*Audit Rates by Taxable Income Bracket in 2019. Source: Government Accountability Office*

Back in 2010, mid-range incomes were only at a 0.7% risk. If $0 or less of income was reported, there was a 20.6% chance of an audit — meaning those playing it conservatively will likely still be OK. However, those taking aggressive positions were at far greater risk, likely running that 1-in-5 risk of audit.

Because of this, I recommend choosing your advisors carefully. Aggressive tax positions should be avoided right now unless the benefit outweighs the risk regarding the cost of litigation. The biggest fallacies I hear in consult calls every week tend to come from Reddit threads, and trust me, Reddit is not a credible source. Be sure to look up your advisors and make sure they are licensed and experienced, as this, at least, will give some grounds to have penalties waived if an aggressive tax position is questioned.

Crystal Stranger is a federally-licensed tax EA and the chief operating officer at GBS Tax. She worked previously as a software developer in San Francisco.