The Hyperbitcoinization of Bitcoin and the Future of Taxes

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It was late November 2019 and I had just won a TechStars contest at the Nipsey Hussles Vector90 in Los Angeles. I was excited to win, but I was even more excited to have passed my ethics exam, the last step before applying to become a CPA. Thirty minutes before the post office closed, I arrived to submit my formal application with a $50 application fee. The postman swiped my card and, to my horror, she said empathically, I’m sorry, this card was declined. You should call your bank.

I checked my banking phone app and saw that the balance was more than the total money order cost. It had to be a bug, what could be going on? My mind raced as I thought about what could be causing this problem. I called the bank, and they informed me that they had closed my account without my knowledge and that I would receive a check within 10-14 business days.

When I asked her why my account was closed, she said she couldn’t tell me. I never knew why. This put me in a very special situation. When will I finally become a CPA? The joy of winning TechStars was over.

I realized then that the value of bitcoin was not in the US dollar amount but in the decentralized utility. Bitcoin allows transactions without intermediaries, for a low cost, and quickly. Not having an intermediary, like a bank or government, prevents accounts from being closed, like what happened, because technology allows everyone, including the unbanked and underbanked, to participate .

What is hyperbitcoinization?

Hyperbitcoinization is defined as when bitcoin becomes the dominant form of currency in the world. People will value bitcoin more than fiat currency or precious metals when this happens. This could happen in the event of a currency crisis caused by central bank policies or because people will increasingly use bitcoin as a payment system. Even so, CPAs will need to quickly learn the ins and outs of digital assets or get left behind, like those who have yet to adapt to the internet.

Hyperbitcoinization would have a huge effect on the taxation of virtual currencies at all levels and bring about a massive change for businesses around the world. The Financial Accounting Standards Board has already started adjusting accounting standards for digital assets such as bitcoin.

As a CPA, I most appreciate the technology behind cryptocurrencies, blockchains, which are databases that function as general ledgers for cryptocurrencies. The bitcoin blockchain is an open-source blockchain that allows decentralized participation to maintain trustless software. In contrast, a central bank digital currency blockchain would be controlled by a central bank. Bitcoin evangelists see bitcoin as the way to escape a government-controlled currency. Whether it’s the government or the people, blockchains are changing money and how we are accountable for it.

FASB and digital assets

As digital assets grow in popularity, regulators need to provide more guidance. The FASB considers digital assets to be intangible assets accounted for using the historical cost method. The primary objective of the FASB is to establish and improve generally accepted accounting principles in the United States in the public interest. At a meeting of the FASB board of directors on October 12, the accounting for digital assets on the balance sheet was voted to move from the historical cost method to measuring fair value.

This rule change could significantly affect the adoption of digital assets, especially bitcoin. Using the historical cost method, CEOs have been discouraged from adding digital assets to their balance sheets. If the price of the asset increased, they could show no profit in the income statement; however, if the price fell, they were forced to take an impairment loss. The fair value method will include both gains and losses in the financial statements.

The objective of a company is to bring profit to the shareholders. If the company suffers losses with no possibility of profit, the CEO and other decision makers could be fired. Why take this risk if you are a decision maker? More importantly, historical cost could significantly undervalue a company that invests in digital assets if those assets increase significantly.

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 changing.

In March 2014, the IRS issued a publication 1421 notice that virtual currency is treated as property and not currency. Although the IRS has not addressed virtual currencies for five years, the Tax Cuts and Jobs Act of 2017 has significantly affected investors. The use of similar exchanges for virtual currencies was no longer allowed, and in the event of loss of assets, they could no longer be deducted as losses.

In 2019, the IRS released Tax Ruling 1924, which clarified specific topics such as airdrops and pitchforks. Additionally, in 2019, on Schedule 1 of 1040 individual tax returns, the agency added the question, At any time in 2019, did you receive, sell, send, trade, or otherwise acquire a financial interest in a virtual currency? This question, slightly adjusted, has since been moved to the front page of 1040 for the 2020 and 2021 tax years. There is talk that a Form 1099-DA may be required from exchanges to provide investors.

The future

A CBDC is a digital asset issued by a central bank. On September 16, the White House released the framework for a US CBDC. A CBDC could automate and simplify the tax process. All transactions would be controlled by a central entity and, in theory, taxes could be automatically levied on individual transfers instead of an annual tax return.

With a US CBDC looming, bitcoin adoption increasing, and regulation becoming more apparent, businesses, governments, and CPAs will need to adapt accordingly. Only time will tell how hyperbitcoinization will affect taxation and business practices, but this event will have a significant impact on our future.

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

Author Information

Charles J. Kelly, CPA is an entrepreneurship-focused CPA with a focus on cryptocurrency and consumer education. You can follow him on Twitter at @cjthesmartguy.

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