I raised some concerns about banks creating their own digital currencies backed by blockchain technology earlier today.
Let me raise another concern now. Who taxes these trades? Where? And in what currency?
You can be sure three things will be argued. The first is that the currencies are created and managed in tax havens so no tax is due on that process.
Second, it will be argued that if they are anywhere these trades are in tax havens, where file servers will, no doubt be located (although this gives rise to interesting questions because blockchain is energy hungry).
Third, it will be suggested that no tax is due as a result.
I almost suspect that the argument will be that these trades are so virtual that they are not anywhere.
In that case it's time for tax authorities to react, now.
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1. They aren’t. The average tax haven employee has lots of experience playing with Excel, and none at all with any serious computing, which is what cryptocurrency requires.
2. It won’t, at least not in pure-play tax havens like Cayman, Jersey etc. The country furthest on with blockchain and finance is Estonia – you might not like their flat tax, but to my knowledge they do not fit the offshore profile. Blockchain is energy hungry, but because so much of the activity is decentralised that isn’t hugely relevant. But the fact is that to be usable, there needs to be an exchange, and that exchange has to be domiciled somewhere. One recent example of an exchange coming to grief was Bitfinex, based in Hong Kong.
3. Not necessarily true either. This is an example. The GNU project is effectively half of what people call Linux (Linux is actually only the system kernel, all of the other open-source Unix analogue is GNU) and has a long and respectable pedigree.
(although this gives rise to interesting questions because blockchain is energy hungry)
There are different schemes for cryptocurrency – proof of work and proof of stake, and other more “modern” consensus algorithms, so this premise is not correct.
Here is the guidance on the taxation of cryptocurrencies by HMRC https://www.gov.uk/government/publications/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies.
I’m interested. Why will these file servers be located in tax havens?
To claim the system us tax free
I think your answer highlights your ignorance on the subject.
There are no servers for blockchain systems. That’s the whole point. It is a distributed database with no central ledger. No servers.
Shall we stop being silly here?
You are saying that this will be run without a central management operation and a mechanism to maintain it?
And you are saying none of the banks in question use servers for their purposes, which could eb located in tax havens?
If you want to be crass feel free to be so, but not here
“You are saying that this will be run without a central management operation and a mechanism to maintain it?”
Yes. That’s rather the whole point of blockchain. No central database or servers, and all the information is contained within the blockchain.
From wikipedia:
A blockchain –originally, block chain–is a distributed database that maintains a continuously-growing list of data records secured from tampering and revision. It consists of data structure blocks that may contain data or programs–with each block holding batches of individual transactions and the results of any blockchain executables. Each block contains a timestamp and a link to a previous block.
A distributed database is a database in which storage devices are not all attached to a common processing unit such as the CPU, and which is controlled by a distributed database management system (together sometimes called a distributed database system). It may be stored in multiple computers, located in the same physical location; or may be dispersed over a network of interconnected computers. Unlike parallel systems, in which the processors are tightly coupled and constitute a single database system, a distributed database system consists of loosely coupled sites that share no physical components.
Now stop living in fantasy land
The reality is that in a regulated financial environment this cannot happen
That was your last post: you’re wasting my time
Intriguing.
Your (apt) phrase of “virtual trading” will be welcomed as justification that any tax paid will also be “virtual” and as such, paid in “virtual” currency – and to whom?
If this ever takes root, it disadvantages “real trading”, and further diminishes the effectiveness of corporate taxes generally.
Is the way forward to concentrate tax on the wealth of individuals, using the concept of “beneficial interest” as the marker for what that wealth might be. Easier said than done, I know, but corporate taxes are clearly so often magicked away even as things stand now, even without the dimension of “virtual trading”
We do, very obviously, need much enhanced taxation in wealth
Lokk forward to seeing an accounting standard for “Blockchain Transactions”.
Trade transacted in currencies that do not belong to any nation, in a dimension not subject to physical audit and based upon an incomplete double entry.
Quite so
Audit is impossible
And the system may be triple entry or single, but definitely not double
Should be fun
This is all so, so wrong. Whether a currency is “virtual” or not makes no difference to the tax position. If it’s currency trading, the virtual currency has an equivalent Sterling value, an equivalent Dollar value and an equivalent everything else value. Any tax due on any economic process will be charged in the local currency at the equivalent rate at the time the transaction took place.
Every major tax authority has had a policy in place on this for a good length of time. These are hardly ground-breaking questions; they are questions which have already been answered and your worries are completely misplaced. Sure, they can argue those things in court, if they like – and then they will be told that the rules are in place, they need to be followed and their tax bill is due. Failure to pay will result in either a winding-up order or a custodial sentence.
To suggest that file servers are involved in blockchain cryptocurrency systems is ridiculous. They are not. No central system is even possible, never mind required, in a blockchain system. Sure, there are exchanges where cryptocurrencies can be traded, in just the same way that there are exchanges where classical currencies can be traded, and they are – surprise, surprise – subject to all the same tax rules. But that’s not a central system – if you shut down the currency exchange, the currency continues to exist just as it did before.
Apart from when we pop down to the supermarket to buy our €uros for going on holiday, pretty much all currency trades are virtual anyway, and any involving a cryptocurrency will be taxed in the same way. There’s nothing new here. It’s just another tradeable currency. The real reason cryptocurrencies are a problem from a tax perspective is nothing to do with whether there’s some file server sat in some tax haven – it’s to do with the lack of traceability of the transactions, which is why they’re used extensively on the Tor network.
It’s the digital equivalent of cash.
Sorry, but this is just nonsense
These are new bank controlled currencies: they are not the same as bitcoin for which (inadequate) tax policy has been prepared
And in a profoundly regulated environment to suggest that blockchain will not involve some central control between all the participating banks is about as likely as a moon mission without a mission control
Of course there will eb a management structure put in place, a protocol established, a set of rules created, a support mechanism established and on and on and on
The idea that any of this will happen in an infrastructure free environment may be a libertarian dream, but it’s also not true. That’s not how banks can or do work. In which case all I have said is relevant and requires answering
As too is the fact that these virtual currencies that are untraceable will spillover with deliberate consequence: when banks know that most of what they might currently do in tax havens will be traceable soon they are looking for new mechanisms outside central bank control to move funds out of view. Please do not for one moment think these new arrangements are not linked to that desire
I really do have very good idea what I am talking about
Decentralised, unauditable, outside central bank control, crypto currency movements managed from offshore? A bankers dream. Now tell me why I am wrong and why in that case the questions are inappropriate
On second thoughts, don’t bother. The answers will be too tedious to bother with
Because there’s still nothing new here. If some nefarious banker decides to store cash on a stealthy nuclear submarine in international waters for tax evasion reasons, or decides to store gold on a spaceship orbiting Pluto, there’s probably not a great deal the tax system can do about it. Ownership of blockchain “currency” is just the same as ownership of any other asset, and it’s possible to hide it just like any other asset. No matter what anyone tries to pretend, it’s not a currency in a “real” sense, because there’s no central bank controlling it. That is unless, of course, a central bank decides to issue that currency and ensures it’s the only one able to issue it, but I can’t see any central bank anywhere in the world being that stupid as to decentralise their own centralised currency system. They’ll stick with what we already have. Therefore, for tax purposes, it is still up to the owner of any blockchain currency to declare it to the relevant tax authorities and pay their taxes accordingly. If someone decides not to, that’s a matter for HMRC and the police.
There still aren’t any new questions here, and none that refer specifically to blockchain currencies, whether “controlled” by banks or otherwise. They’re just questions about asset ownership.
1. If gold is mined in Belize (for the sake of argument) by Santander, do they owe any money to HMRC?
2. If Santander sell some of the gold they have stored in a shed in Belize to UBS, who happen to have a shed in Belize full of £20 notes with which to make the trade, do either of them owe any money to HMRC?
3. Would it be valid for them to argue that no tax is due to HMRC as a result of this particular trade?
These “new bank controlled currencies” aren’t really any different to them using precious metals to decide which bank owns how much of what. The only real reason for them to want to do it is for them to have a faster settlement and clearing mechanism (although it’s debatable as to whether that’s even workable). Your questions aren’t about the taxability of cryptocurrencies – they’re about “hiding” assets offshore.
Except you show that you know nothing about the real nature of money or tax when making such comments
Do you ever do any research into matters before offering your opinion? There is plenty of information about blockchains on Wikipedia. Your ignorance simply makes you look foolish and arrogant.
I have read quite a lot, yes
That’s precisely why I am willing to challenge the cult of blockchain, let alone bitcoin
Because a cult is what it is
Which explains the abuse one gets if one dares to challenge it
“Because a cult is what it is
Which explains the abuse one gets if one dares to challenge it”
Change one letter of “cult” and a couple of pronouns, and you have a pretty good description of yourself and this website, Mr Murphy.
It’s the first day suggestions of this sort have been posted here
I deleted the rest but as a group you seem to be persistent so I thought I would let one through
And now you know why I consider most of those promoting both Bitcoin and blockchain cannot be considered reliable witnesses to anything
First of all, Richard, congratulations for allowing this degree of freedom for people posting on your blog. I’m sure it will be more lively in consequence.
It does not follow, alas, that because contributors abuse you, they are of necessity wrong to disagree. It only signifies that they express themselves less elegantly than others though the play on “cult” must have made you smile.
When I got up this morning I knew less about blockchains than the babe unborn but this evening I know more and admire that anyone can be as obdurate as you in the teeth of lengthy, detailed and polite exposition from people posting to your site.
Oh dear, another troll playing it a different way
Answer the questions I have raised
Then we will see if you’ve learned anything
PS And how do I know you are a troll?
Only a troll would find that comment amusing