The IRS treats bitcoin and other crypto as property. So, each property transfer can trigger taxes. That can mean tax to the recipient, plus tax to the transferor. It is the latter that catches many people by surprise. The owners of bitcoin and other cryptocurrencies are responsible for paying taxes on transfers.
A key tax question on each transfer is the market value at the time of the transfer. With the wild swings in value that many crypto assets have experienced, that can be a frightening proposition. Some crypto investors resort to putting their crypto in legal entities such as corporations, LLCs or partnerships. These entities can face the same transfer issues, but it is usually possible to contribute the crypto to the entity without triggering taxes.
Then, the thought may be that reporting and accounting with a business entity may be easier. Inevitably, though, there are tough tax issues to address. Another avenue now being considered is a crypto trust. This is really just a trust that holds crypto assets. Trusts can be taxed in several different ways,
The blockchain is basically a distributed database. Think of a giant, global spreadsheet that runs on millions and millions of computers. It’s distributed. It’s open source, so anyone can change the underlying code, and they can see what’s going on. It’s truly peer to peer; it doesn’t require powerful intermediaries to authenticate or to settle transactions.
It uses state-of-the-art cryptography, so if we have a global, distributed database that can record the fact that we’ve done this transaction, what else could it record? Well, it could record any structured information, not just who paid whom but also who married whom or who owns what land or what light bought power from what power source. In the case of the Internet of Things, we’re going to need a blockchain-settlement system underneath. Banks won’t be able to settle trillions of real-time transactions between things.
So this is an extraordinary thing. An immutable, unhackable distributed database of digital assets. This is a platform for truth and it’s a platform for trust. The implications are staggering, not just for the financial-services industry but also right across virtually every aspect of society.