Tax and the Blockchain

The blockchain, or distributed ledger technology, will revolutionize the way the world does business, much like the Internet did over 20 years ago.  The applications for this technology are endless, and include, at a minimum:

  • Financial services
  • Payments and asset transfers
  • Securities and commodities trading
  • Smart contracts
  • Supply chain management
  • Sanctions and export control compliance
  • Intellectual property protection and digital rights management
  • Identity management and security
  • Auditing and compliance improvements in proprietary networks
  • Government services
  • Internet of Things

The blockchain has the potential to impact every company, in every industry, in every part of the world.  Currently, blockchain technology is most widely known through its use as the distributed ledger for Bitcoin, a virtual currency. 

Steptoe’s Blockchain Team has a unique role in the blockchain industry and brings an unparalleled combination of financial technology, financial services, tax, regulatory, and law enforcement experience. Steptoe serves as an advisor to both Coin Center and the Chamber of Digital Commerce, two of the industry’s leading advocacy groups.  Steptoe also co-founded and leads the Blockchain Alliance, a coalition of over 25 of the leading companies in the blockchain space that is engaged with government agencies all over the world, educating them about, and helping promote the growth of, this technology.

Steptoe’s Blockchain Team provides a holistic approach to blockchain issues for our clients, providing legal and strategic guidance, helping clients develop and implement proactive blockchain strategies, and advising on legal and regulatory issues relating to this technology.  We have advised venture capital firms, financial institutions, and both early-stage and more established companies on digital currencies and distributed ledger technology.  And Steptoe is the go-to firm for any institution dealing with US or foreign governments on blockchain issues.  We provide an array of services, tailored to your institution, in partnership with your internal strategy and technology teams as well as your other service providers.

Potential Tax Issues:

Given the vast potential of blockchain, the tax implications can be complicated and depend on the application.

The characterization of blockchain transactions is unclear.  For example, should transactions be regarded as a transfer of goods, the performance of services, or something else?  The source of income from blockchain transactions is also unclear.  The decentralized and international nature of blockchain could give rise to differing characterizations and sourcing of the same transactions by multiple state and international taxing authorities.  This could lead to disputes with the IRS and state agencies, as well as implicate the competent authority process to resolve matters relating to US taxpayers and foreign governments.  

Bitcoin transactions are recorded on a blockchain and provide the best known implementation of blockchain technology.  The IRS has determined that bitcoins are property, not currency.  As a result, unlike dollars, changes in the value of bitcoins from acquisition to disposition will result in gains or losses.  Further, basis, as well as gains and losses, will need to be tracked and recorded, which can be burdensome.  The IRS guidance is limited, however, and many tax issues remain unanswered.

Because of the breadth of applications of blockchain and the current uncertainty surrounding the tax treatment, applications will need to be evaluated on a case-by-case, jurisdiction by jurisdiction, basis. Steptoe's tax attorneys are uniquely positioned to advise on these tax issues.

In addition to analyzing the tax consequences, Steptoe can bring in a range of blockchain technology, information technology, and consulting partners to provide a full-service approach to evaluating and adopting blockchain and distributed ledger technologies.

For more resources about the blockchain and to learn more about our Blockchain Team, please visit Steptoe’s Blockchain Team site.