Hyperbitcoinization of Bitcoin and the Future of Taxes

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

I checked my banking phone app and saw that the balance was more than the total value of the money transfer. It was a mistake – what could happen? My mind raced as I thought about what could be causing this problem. I called the bank and they said they closed my account without my knowledge and I should receive the check in 10-14 business days.

When I asked why my account was closed, he said he couldn’t tell me. I never knew why. This put me in a very strange position. When will I finally become a CPA? The fun of winning TechStars is over.

I realized then that bitcoin’s value is in a decentralized utility, not a dollar amount. Bitcoin allows for low cost and quick transactions without intermediaries. The lack of an intermediary like a bank or government prevents account closures — which happened to me — because technology allows everyone, including the unbanked and underbanked, to participate.

What is Hyperbitcoinization?

Hyperbitcoinization is defined as the moment when bitcoin becomes the dominant form of money in the world. When this happens, people will value bitcoin more than fiat currency or precious metals. This could happen if there is a currency crisis caused by central bank policy or if people use bitcoin more and more as a payment system. However, CPAs must learn the ins and outs of digital assets quickly or be left behind as those who have yet to adapt to the internet.

Hyperbitcoinization will have a major impact on the taxation of virtual currencies and will result in major changes for businesses around the world. The Financial Accounting Standards Board has already begun amending accounting standards for digital assets such as bitcoin.

As a CPA, I most appreciate the technology behind blockchains, which are databases that act as public ledgers for cryptocurrencies. The Bitcoin blockchain is an open-source blockchain that allows for decentralized participation in the trustless storage of software. In contrast, a central bank digital currency blockchain will be managed by a central bank. Bitcoin evangelists see bitcoin as a way to escape government-controlled currency. Whether it’s government or people, blockchains are changing money and the way it’s settled.

The FASB and Digital Assets

As digital assets grow in popularity, more guidance is needed from regulators. The
The FASB treats digital assets as intangible assets accounted for using the historical cost method. The primary purpose of the FASB is to establish and improve generally accepted accounting principles within the United States in the public interest. At the FASB Board Meeting on October 12, it was voted to change the accounting of digital assets on the balance sheet from the historical value method to the fair value measurement.

This rule change could have a major impact on the adoption of digital assets, especially bitcoin. Using the historical cost method, CEOs were barred from adding digital assets to their balance sheets. If the price of the asset increases, the profit and loss statement may not show any profit; but if the price fell, they had to take an impairment loss. The fair value method will include both gains and losses in the financial statements.

The purpose of the corporation is to bring profit to the shareholders. If the corporation is making a loss without making a profit, then the CEO and other decision makers can be fired. If you are the decision maker, why take that risk? More importantly, historical value can dramatically undervalue a company investing in digital assets if those assets rise dramatically.

The IRS and Digital Assets

The IRS collects federal taxes and enforces the Internal Revenue Code. Over the past few years, the IRS has increased its focus on digital assets, and the rules are constantly evolving.

In March 2014, the IRS issued Notice 14-21 stating that “virtual currency is treated as property” and “is not treated as currency.” Although the IRS hasn’t addressed virtual currencies again in five years, the Tax Cuts and Jobs Act of 2017 has had a significant impact on investors. It was no longer allowed to use similar exchanges for virtual currencies, and when assets were lost, they could no longer be deducted as losses.

In 2019, the IRS released Revenue Ruling 19-24, which clarified specific topics such as airdrops and forks. Also, on Schedule 1 of your 2019 1040 individual tax return, the agency asked, “At any time during 2019, did you buy, sell, send, or exchange any financial interest in any virtual currency?” added the question. This slightly revised question has since been moved to the front page of the 1040 for the 2020 and 2021 tax years. There is talk that exchanges may require a 1099-DA form to satisfy investors.

The future

CBDC is a digital asset issued by a central bank. On September 16, the White House released the framework for the US CBDC. CBDC can automate and simplify the tax process. All transactions will be managed by a central agency, and in theory taxes could be automatically deducted from individual transfers instead of annual tax returns.

As CBDC approaches in the US, bitcoin adoption increases and regulations become clearer, businesses, governments and CPAs will need to adjust accordingly. Only time will tell how hyperbitcoinization will affect taxes and business practices, but this event will have a significant impact on our future.

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

Author information

Charles J. Kelly, CPA is an entrepreneurially oriented CPA focused on cryptocurrency and educating the general public. You can follow him on Twitter at @cjthesmartguy.

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