Developing a Novel Conceptual Tax Regulatory Framework for Crypto Tokens  

By | January 29, 2024

The notions behind decentralized virtual currency were developed over a long period of time and decades before the introduction of Bitcoin, the first cryptographic virtual currency, in 2008. To a certain extent, they express the idea of “denationalization of money,” which represents a significant part of the work of the Nobel laureate Friedrich Hayek from the early 1970s.  

In fact, the evolution of non-governmental medium of exchanges1 started thousands of years ago and with no governmental intervention.2 Similarly, non-governmental currencies appeared centuries ago for various non-tax reasons. For instance, U.S. banks sponsored non-governmental currencies in the 19th Century,3 and even before that, merchants in various countries issued their currencies and notes as integral parts of their ordinary course of business. As David Evans points out, one study reported that more than 2,000 shopkeepers in Mexico City were issuing a metal token called the tlaco in 1766,4 and other examples reveal that the medium of commercial exchanges in the past included various types of commodities. These non-governmental sponsored currencies have generally not lasted as general-purpose currencies, although some did solve challenges for transactors for a period of time.5 However, despite the many examples of non-governmental mediums of exchange in human history, the cryptographic public ledger platforms are revolutionary because they offer people from all over the world an easily accessed money system that is not governed by any authorities or trusted third parties, such as governments, central banks, and private banks. Virtual currencies also reduce tradeable/exchanged costs.6 

However, the works Hayek, which concentrated on the denationalization of money, evolved when there was an increasing concern about the effects of inflation on economic activity and a growing distrust towards governmental economic decision-making and monopolistic powers, as well as unjustified governmental intervention. The idea was that introducing decentralized money would bring competition between different currencies and undermine the monopolistic nature of governmental monetary powers. Hayek believed that the privatization of money could increase competition between currencies, allow currency choice, and, through market forces, eventually lead to currency consolidation. 

The past decades’ technological innovation and developments with the mass adoption of the internet around the world have led many to question and rethink what they know about money and fiat currency. But, along with the opportunities this technology may bring, it also fostered a growing concern that these changes would make it harder for governments to collect taxes in the future and that the use of virtual currencies is often criminally motivated (fraudulent dealings or even worse as means to fund terrorism, human trafficking or drugs). From a tax point of view, the introduction of virtual money forced governments to reexamine their tax rules that were formed a century ago when both physical and human capital were relatively static. However, these technological breakthroughs also present opportunities for tax authorities. 

We challenge the informal and uncoordinated attempt of governments around the world to push back some, or most, of the technological innovations that could undermine their existing monetary rules and possibly undermine the significance of banks, stock exchanges, and other financial institutions. We question the relevance of the “realization principle” as it relates to the taxation of crypto tokens, which enables deferral of the taxable event until the crypto tokens are sold or exchanged and its regressive impact. The idea of such deferral was introduced within many income tax systems over a century ago (a period in which income tax was in its infancy) even though it contradicted the principal idea of taxing “all income from whatever source derived” and with the theoretical definition of income as formulated by Robert Haig and Henry Simons (“income” is the sum of (a) the value of the taxpayer’s consumption during the period of assessment and (b) the change—whether positive or negative—in the net value of her assets). Accordingly, changes in the net value of assets and, more specifically, accession to wealth are not ordinarily taxed until the property is sold or exchanged. However, a careful analysis of the principal justifications for deferring taxation on unrealized appreciation (lack of liquidity, marketability, significant transaction costs, and lack of relevant information about the assets’ valuation) seems irrelevant for the taxation of crypto tokens and, as such, adopting the realization principle is unjustified or unnecessary in our view. We also argue that to the extent that governments/tax authorities offered such favorable tax rules as a “chilling effect” on daily usage of these tokens, such tax deferral reduces, suppresses, discourages, delays, or otherwise rewards token owners not to exchange or otherwise dispose of such tokens as means of payment is erroneous and should be rethought. And, most importantly, such deferral is regressive as it gives the tokens’ owners a significant tax deferral benefit that is available only to them. 

Even though crypto tokens entered our lives 15 years ago, most countries did not adopt specific rules to address their unique characteristics (its pseudo-anonymous nature, regularly tradeable nature, high liquidity for most tokens, minimal/reduced overhead/administrative costs, virtual nature, decentralized nature, and high volatility), leaving policymakers, tax authorities and courts struggle to accommodate cryptocurrencies within tax systems that had not been designed to handle them. Therefore, the article calls on legislators to develop a novel regulatory tax framework based on their unique characteristics. It focuses on the tax implications following the acquisition of crypto tokens and ending on the date such tokens are disposed of and offers a novel conceptual tax regulatory framework that, in our view, would better fit the unique characteristics of crypto tokens and be in line with the principles underlying good tax policy. 

The contribution of this article is fourfold. First, we propose changing the current academic and legal discourse that focuses on determining which of the existing tax tracks is the most suitable to tax crypto tokens (whether to treat it as tangible property, money/currency, commodity, or actively traded property).We recommend adopting a unique regulatory tax framework that fits the unique characteristics of the crypto tokens; as such, it is irrelevant whether crypto tokens meet the three functions of currency (medium of exchange, storage of value, and unit of account) or if it better fits the definition of property/security. These distinctions belong to a different economic reality that is no longer relevant regarding digital currency. Second, we wish to propose a novel regulatory framework that would bifurcate the taxable event of crypto tokens into a partial taxable event that is taxed currently, and another taxable event that will be taxed upon disposition/exchange and that would capture unrealized appreciation (a catch-up provision).  

Third, we propose amending the loss limitation rules and incorporating protective measures that would allow taxpayers to offset losses more flexibly and protect governments from sharp value decline that could empty/erode their state budget. Fourth, we propose developing a reporting obligation similar to FBAR (Foreign Bank and Financial Account Reporting)/FATCA (Foreign Account Tax Compliance Act) reporting requirements (Crypto Token Reporting) that would fit the unique characters and values of crypto tokens. 

Last, as we point out, existing tax systems currently offer deferral and hardly tax capital appreciation of crypto tokens. These tax systems also do not require token owners to report their crypto investment and wait patiently for deferral, which, unfortunately, rarely comes. This deferral psychologically makes it difficult for taxpayers to pay their tax liability. While it is much easier to report low amounts and pay taxes on low profit, the reporting and tax deferral forces the taxpayer to decide whether to report/pay when the crypto investment is larger and psychologically more challenging. Therefore, we believe that the realization principle and deferral should be repealed, and a novel tax rule should replace it, at least for taxing crypto tokens. 


Tamir Shanan is a Faculty Lecturer at the College of Management Academic Studies  

Doron Narotzki is a Professor at the University of Akron’s George A. Daverio School of Accountancy. 

Lior Zaks is a Doctoral Student at the Hebrew University’s Faculty of Law. 

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