Most tax authorities see cryptocurrencies and crypto-tokens as commodities. As we know, there are several types of crypto-tokens:
- Assets (land, metals, gemstones, antiques, etc.)
A token can represent almost any kind of value, different people can purchase the same token for different purposes, and tokens can change their “type” or purpose over time. A crypto-token can represent your gym membership or a ride-sharing credit. Yet most governments tax them as if they were investable assets.
Suppose you go to an exchange and want to trade bitcoin for Pillar tokens. This trade breaks down as:
- Sell bitcoin to exchange, pay blockchain settlement fee in bitcoin (1 taxable transaction)
- Receive Pillar tokens from exchange. In this case, someone has to pay the gas (blockchain settlement) fee on the Ethereum blockchain (2 taxable transactions)
That trade has three taxable transactions. In each case, the seller has to calculate his net gain/loss on each. When were these tokens purchased and for how much? What was the gain/loss at the time of sale? Which tokens get long-term capital gains treatment and which are short-term gains?
Now suppose you use those Pillar tokens in your Pillar wallet. You want to buy a Pillar t-shirt in the store in the wallet (this should be possible by September). The shirt is priced in ether. You pay a certain amount of ether for the shirt, plus you pay an extra amount in PLR tokens, which are required to use the system. The current fee for an Ethereum blockchain transaction is 40 cents. So here’s your breakdown:
- Pay the ether for the shirt.
- Pay the sales or VAT tax, probably in ether.
- Pay the ether fee to settle the shirt/tax transaction.
- Pay the PLR to the system.
- Pay the ether fee to settle the PLR transaction.
In this case, it’s likely that the PLR charge (4) is less than its blockchain settlement fee (5). ALL of these transactions are taxable events. This is the nightmare we find ourselves in as we try to reinvent the world of finance. Using dollars or euros, we don’t have any tax consequences, but using blockchain-based tokens, we do. Neither side – 1) those of us designing and using cryptocurrencies/tokens and 2) those charged with collecting tax – is prepared for this unintended battle.
How Should Systems Charge for Access?
There are some things we can do to limit the damage. These tactics apply to groups that have systems that use tokens to “power” the system, as advertised in most white papers.
There should be no transaction tokens. Charging some amount of tokens for each transaction incurs a blockchain settlement cost and triggers two separate tax events per transaction.
Any system using tokens on a per-transaction basis should switch immediately to one of the following models:
Coupon model: the user pays in advance for a number of internal bookkeeping units that then pay for transactions. For example, she would purchase a “booklet” of ten transaction credits and then spend them as she uses the system. Because they are internal units of account and not blockchain-based assets, purchasing the coupons is a single taxable event but spending them is not.
Subscription model: the user purchases a time-based subscription fee for your system’s services, so she would pay a certain amount every month, and all her fees are covered. There would be a fee to settle the subscription payment, which would produce two taxable events. It may be better to charge people once a quarter than once a month. No one wants extra Ethereum fee charges or taxable events.
Staking model: reward users who maintain a certain minimum balance of your tokens with free use of the system. There are economic advantages and incentives for this, but it probably shouldn’t be the only way to charge for access. I think you would want to encourage it but use a monthly pay-as-you-go model as a back-up.
This article was contributed by David Siegel. David is the founder and CEO of the Pillar Project, a nonprofit Swiss foundation building the world’s first smart wallet for crypto-assets. He is the author of Pull, business strategy in the age of the semantic web, and The Token Handbook, the first book on tokenomics.
Particl Launches Decentralised Marketplace With Zero Commission Fees
Privacy-focused cryptocurrency project Particl has launched a decentralised marketplace with zero commission fees. The new e-commerce platform is leveraging blockchain technology to compete with the likes of Amazon and OpenBazaar.
Privacy and Zero Commission Fees
The new decentralised marketplace respects user privacy and does not require personal information from its users. The platform only requires a shipping address. Moreover, the decentralised nature of the Particl marketplace ensures that no commissions are added to sales as is the case on Amazon.
According to an article on Big Commerce, fees for sellers can be as much as 45 percent of a product’s cost on Amazon. Particl’s zero-free model, therefore, enables sellers to significantly increase their revenue and lower their prices to stay ahead of the competition while still making a profit.
“Using a combination of P2P and blockchain technologies, Particl Open Marketplace can provide a verifiable private shopping experience that ensures no user data can be created or collected by any party other than the one you are transacting with. The Particl protocol also brings the cost of buying and selling online to the bare minimum as no central entity can charge fees,” said Particl’s Project Marketing and Strategy Manager Paul Schmitzer.
How Particl’s Decentralised Marketplace Works
Particl is uniquely approaching fraud and trade insurance through the use of a double deposit escrow system without intermediaries and with zero fees. This system is based on MAD game theory where two parties deposit PART coins as collateral into a smart contract. Once the transaction between them is complete, the coins are released back to the parties and no fees are charged. This system allows users to be in control of their transactions and to eliminate fraud.
Since the marketplace is decentralised, the protocol generates all listing fees and redistributes them to the global network of users.
Particl is made up of three components: an untraceable multi-purpose privacy coin, a private decentralised marketplace where users can shop with cryptocurrencies, and a platform where developers can build decentralised applications.
Particl allows a wide range of cryptocurrencies and uses atomic swaps and third-party integrations to convert these coins to PART during transactions. The company will soon add more payment options to its marketplace.
In 2018, Bitcoin Africa talked to Particl’s spokesperson Desi-Rae about the project. Read the full interview here.
South Africans Can Now Buy Ether (ETH) Using Rand on Luno
Global cryptocurrency exchange Luno has now enabled crypto traders in South Africa to buy ether using rand on its platform.
Trading on Luno
Luno offers users an easy and safe place to buy bitcoin and ether and to learn about cryptocurrencies. The exchange has more than 2.7 million customers across 40 countries.
Luno also has a dedicated Ethereum series on its learning platform to help users make informed investment decisions.
Commenting on the new launch, Luno’s General Manager in Africa, Marius Reitz, said: “The direct Ethereum/Rand pair will make it quicker, simpler, and cheaper for customers to interact with and use Ethereum on the exchange. We are working on a number of enhancements to our platform and this pairing has been introduced in response to demand from our customers. Previously, customers could buy Ethereum through our instant buy option but having this ability directly on the exchange makes it faster and cheaper for traders.”
According to Reitz, Luno makes sure that every coin listed in its exchange has undergone due diligence. “There are over 2000 cryptocurrencies. However, many of these are scams, so customers need to trust that the exchange they use has verified the track records of cryptocurrencies available on their platforms. Luno limits the currencies on offer to those on which we have completed extensive research and due diligence and we are satisfied with their credibility in terms of security and adoption. Luno will be adding additional cryptocurrencies to its platform later this year,” he explained.
“Individuals in these markets cannot afford to, and should no longer need to, pay high exchange rates, accept national currency devaluation or lose out when they simply transfer money. Access to a more inclusive financial system will enable people everywhere to think of new and better ways of exchanging value and technology allows this,” Reitz elaborated.
Luno plans to upgrade its platform, expand its team, and open new offices in expectation of the next surge in the value of cryptoassets.
Emerging Markets More Likely to Adopt Cryptocurrencies from Global Brands, Luno Study Says
A new study by digital asset exchange Luno indicates that emerging markets are more likely to adopt cryptocurrencies from global brands. This finding was collected from a survey called the ‘Future of Money’ carried out between May 17, 2019, and June 7, 2019. The survey interviewed over 7000 respondents from Nigeria, South Africa, the United Kingdom, France, Indonesia, Italy, and Malaysia.
Emerging Markets, the Future of Money and Libra
According to the ‘Future of Money’ survey, the early adopters of cryptocurrencies are likely to come from emerging markets. The findings, therefore, show a close connection between emerging markets and the future of money confirming the view that those with “less appear to take greater financial risks.”
These results come at a time when Facebook recently announced that it will introduce Libra, a new digital currency in 2020. The aim of Libra is to help people make financial transactions online, especially in emerging markets where banks are not servicing the population as well as they should be.
Luno’s CEO Marcus Swanepoel said: “As some of the world’s largest tech giants announce they are launching cryptocurrency coins, we believe developing markets will be the lead adopters. Our research shows that in these markets people are more financially savvy because they have to be, which means that they need and understand the benefits the new coins can offer.”
To further show why the future of money could have a greater impact on emerging markets, data from the survey indicated that 33 percent of people in Indonesia are more likely to remain within a set budget compared to 0 percent in the UK.
Additionally, the number of people that establish a monthly budget is 80 percent in Malaysia, 65 percent in Nigeria, 73 percent in South Africa, 74 percent in Indonesia, and 54 percent in the UK. Asked why money is crucial to them, the respondents said it was to secure their families’ well-being (60 percent) and to pay for education. This answer was given by 25 percent of the respondents from Nigeria compared to 8 percent in the UK.
Luno is a global cryptocurrency company headquartered in London and with offices in South Africa.
Crypto adoption will probably take place at the grassroots level than at the institutional level, Swanepoel observed. He based this argument on the findings that most people from emerging markets will probably seek financial advice from family, friends, and colleagues than from government organisations.
“It is very clear that if money is not simply a ‘nice to have’ and is vital for your future, then you spend more time understanding it, managing it, preserving it and to an extent being creative with how you maximise the use of it. Therefore, if a cryptocurrency can provide a secure and cheaper means of exchanging value better than the existing system, it will be used. This is why we believe that as new cryptocurrencies linked to global brands are introduced, they will find an important audience in emerging markets,” Swanepoel added.
Luno’s study paints a clear picture of what the future of money could look like. However, certain factors such as Internet connectivity could inhibit the fast adoption of crypto in developing markets.
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