Blockchain
Bringing digitalization to the business world: A DLT adoption outlook
Published
2 Wochen agoon
By
To date, the ever-evolving DLT landscape has brought about dramatic changes to the world of finance and businesses in multiple industries. While blockchain is a type of distributed ledger technology, there are various other applications that have emerged since the advent of Bitcoin (BTC) over a decade ago.
What makes DLTs special is their capacity to cut out intermediaries in most supply chains while making it possible for stakeholders to collaborate autonomously without the need for a centralized authority figure. As the world continues to digitize its traditional workflow processes, the significance of DLTs increases.
Now, DLTs, in combination with other technologies, including the Internet of Things and artificial intelligence, are attempting to change the way trust and accountability are perceived while making it easy to track operations and achieve efficiency.
A recent study published by the World Trade Organization in conjunction with Trade Finance Global highlights how expansive the use cases of DLT can be. The study looks at how companies and organizations spanning across different industries, such as finance, supply chain logistics and insurance, are using DLTs to increase efficiency in their business operation.
Know Your Customer
One sector that has benefited from the adoption of blockchain and DLTs is the Know Your Customer solutions market. Given the challenges faced by financial services during verification and identification of customers in the fight against financial crime and money laundering, the traceability and immutability of DLTs make these two a perfect fit.
Clipeum
Clipeum is a consortium of banks, asset managers and insurance companies (including Société Générale, Natixis, Commerzbank, Tikehau Capital and R3), and a European-based entity that are striving to solve inherent inefficiencies in the sector through the use of an open-source pooling and collection protocol for KYC-related documents. The platform allows corporate treasurers to manage and grant access to requested documents.
The platform offers free access to corporate data providers, while financial institutions that consume the data pay a fixed license fee and a variable cost depending on the volume of data consumed.
CamelOne
This Singapore-based company has created a platform called vCargo that connects supply chain stakeholders digitizing the entire end-to-end process through the creation of organizations and institutions. So far, the platform offers up to 12 trade finance products, including access to letters of credit, import services and other trade products. The CamelOne platform is currently in use among logistic and collection companies as well as banks, not to mention the Singapore International Chamber of Commerce.
KYC-Chain
The company hopes to streamline the onboarding of the KYC process by allowing users to securely manage their digital identity while giving businesses and financial institutions access to tools to manage customer data.
At its core, KYC-Chain is a workflow solution built using DLT security features. For most businesses and financial institutions, such as Solex, BlockReal and Maxonrow, the platform goes beyond verifying customer identities to include a suite of solutions that manages the entire customer lifecycle in a reliable manner. So far, the project has completed over 500,000 successful onboardings with participants across the globe, according to a WTO report.
Insurance
Insurwave offers a software-as-a-service solution for marine insurance companies that want to connect with clients (individual people and companies). Its DLT platform is a private blockchain that eliminates challenges such as high transactional costs and risk management, among other challenges surrounding the marine insurance industry workflow. With about 20 clients onboard, including Moller, Willis Towers Watson and Gard Insurance, Insurwave is able to generate revenue through annual license fees and on a charge-per-use model.
Trade documents
As more businesses continue to digitize their workflow processes, the need for legally digitized, enforceable documents increases. While smart contracts can be used in some instances as the digital equivalent of physical paper contracts in trade, they do not possess the flexibility and convenience of legal paper documents.
CargoDocs
Through the use of a DLT on the Amazon Quantum Ledger Database, or AWS QLDB, CargoDocs offers an immutable and cryptographically verifiable transaction log of final documents and titles while also maintaining a verifiable history of changes to those documents.
Although the AWS QLDB is not a blockchain in the traditional sense, it shares attributes that make it similar to a DLT enabling the integration of CargoDocs across several DLT solutions. On a charge-per-use basis, the platform enables its users to create a number of digital trade documents, including electronic bills of lading for financial institutions and letters of credit.
Enigio
Enigio is a digital document service provider based in Sweden that focuses on creating and managing digital original documents — invoices, medical journals, mortgages, promissory notes, wills, testaments, etc. — that are freely transferable on digital networks.
The company’s Trace:original product combines blockchain technology with Ricardian contracts to establish a DLT-based notary service that allows verification of digital documents without the need to store users’ or business data outside of the digital document. The tool turns documents into digital assets that can be stored locally by a holder, and the solution can be used to digitize all kinds of documents.
Enigio charges a fee for the creation of the document, but once created, it can be owned, managed and shared freely without anyone having to be an Enigio customer.
CargoX
CargoX has created an open-source Blockchain Document Transaction System that supplies bills of lading on the Ethereum network. The BDTS is able to tokenize, encrypt and transfer the bill of lading documents, as well as other trade documents through an API system, which is interoperable with other blockchains.
So far, the platform has received accolades and recognition with awards such as the Blockchain Innovation of the Year in 2019 from the Transport and Logistics Middle East Excellence Awards. With current partners including the likes of Global Value Network, Maker, Mana and CargoX plans to have launched a possible KYC solution by 2021.
Dltledgers
Dltledgers is an Asia-Pacific and Middle East-based DLT platform that digitizes trade documents and contracts, thus allowing commodity traders and large manufacturers to trade across borders. Some of its core services include the digitization of documents in account-payable financing, supplier financing networks, and provenance and sustainability processes. Built on a Hyperledger Fabric-based network, dltledgers aims to compete with the likes of We.trade and Komgo.
eCom
Based in Asia, eCom is a business-to-business data integration company that offers a DLT-based solution to securely share and exchange trusted data. Since the company mainly serves institutions in trade and finance, control and ownership of these documents are crucial. For cross border trade connectivity between countries, eCom uses a bi-directional exchange registry.
In the future, eCom plans to launch the second phase of its project in the hopes of implementing the transfer of trusted data through its registry as a solution for digitizing trade documents. Thus far, the eCom registry has shared over 320,000 documents from over 3,100 organizations, including IBM, Accenture and MuleSoft, to mention a few.
edoxOnline
EdoxOnline is a ready-to-go DLT platform built on the Ethereum network for digitizing international trade documents. By linking and interconnecting the different stakeholders in international trade transactions, edoxOnline streamlines the document issuance process to speed up international trade, mitigate human errors and eliminate fraud, which are all challenges inherent in the industry. The platform has a number of users, including shippers, surveyors and trading companies, such as The Russell Marine Group and Alex Stewart International.
The platform is capable of handling electronic bills of lading and other documents while enabling real-time collaboration and privacy.
Galileo Bolero
Bolero provides secure communication between various stakeholders in the trade and shipping process. Although it has a blockchain-agnostic platform, Bolero aims to enable interoperability between different DLT platforms and non-DLT platforms through the use of APIs.
At its core, the company’s technology aims to ensure secure and efficient communication by offering enterprise-level tools necessary for the secure sharing of information across different blockchains.
TradeWindow
Based in the Asia-Pacific region, TradeWindow is the company behind Cube, a DLT platform for trade administration that allows importers and freight forwarders to share shipping documents and supply chain data with permissioned partners. The platform operates as a single source of truth system capable of digitizing compliance, risk management, export documentation and trade finance.
With Cube, importers and exporters have access to an immutable audit trail with every B2B or business-to-government exchange. TradeWindow claims to have over 700 customers with an array of supply chain participants, such as Western Union, Mastercard and the Commonwealth Bank of Australia.
Trusple
The Trusple platform is a creation of AntChain, a blockchain-based solutions provider for cross-border trade. The platform operates as a financial service provider generating smart contracts that dictate shipping and payment terms so as to automate and process payments when conditions are met.
Through the use of smart contracts on the blockchain, Trusple is able to digitize traditional, manual, paper-based international trade value chain while making each contract tamper-proof. Some of its main use cases include banks and small and medium-sized enterprises, such as Citi, DBS Bank, Deutsche Bank and Standard Chartered.
Vakt
Vakt is currently only available in the oil markets and serves to enable various traders, terminals, brokers and trade finance banks the capacity to securely and seamlessly exchange data and trade documents directly from their internal systems. The platform is built via the collaboration and partnerships of companies with the same goal such as BP, Equinor, Gunvor, Koch Supply & Trading, Mercuria and Shell.
The blockchain-built platform allows users to manage physical transactions, and confirm trade and invoice settlements without the inefficiencies of paper-based processes. Like most DLT platforms in the sector, Vakt operates as a single source of truth for participants in its ecosystem with a distributed audit trail that safeguards data privacy.
Wave BL
Since it was first founded in 2015, Wave has claimed to be the world’s first live document exchange application. To test and roll out its platform, the company has partnered with the likes of Barclays Bank, the Israel Shipping Company and Sparx Logistics, a China-based logistics firm.
WaveBL is designed to enable its users the ability to exchange and digitally sign documents such as bills of lading in a cryptographically encrypted peer-to-peer network. Therefore, without a central registry, Wave’s users can manage their trade documents with every transaction.
Supply chain
Aero Blockchain Alliance
The air travel industry has been one of the hardest hit by the coronavirus pandemic. However, Sita, a solutions and service provider to airlines and airports, has created the Aero Blockchain Alliance as a solution to some of the key business pain points in the sector by applying DLT.
Apart from blockchain technology, the platform will aggregate electronic data for freight forwarders and shippers, not to mention airlines and ground handlers that use IoT. By enhancing cargo with IoT sensors, the platform will be able to perform advanced tracking of shipments. Other import and export transportation documents will also be digitized through the platform automating key processes.
Calista
Calista is a U.S.-based automated export services company that verifies logistic documents and compliance activities while also providing track-and-trace solutions. With a global reach of participating entities on its platform, Calista uses a fee and subscription model for its services. Some of its most prominent participants include Astana International Finacial Centre, Trade-Van, China-ASEAN Information Harbor and Thailand’s Ministry of Trade and Industry.
China–Europe e-Single
Officially launched on Oct. 23, the China–Europe e-Single integrates several administrative services on its platform. These services include monitoring of the logistics supply chains, facilitating intermodality and traceability of cargo across the value chain, as well as integrating several supply chain management services on one platform. Therefore, participating companies can monitor their logistics supply chain, thus making it possible to respond in record time especially during periods of constraints such as the current global pandemic.
Deliver
Although this platform is built with a decentralized architecture that optimizes the flow of information in international trade, it has features that support asset notarization, user verification and asset registration. Therefore, any document or even an event required in international trade can be digitized through the platform to increase its level of trust.
Currently, the platform is focused in Singapore, the Netherlands and South Korea with participants such as Samsung SDS (a shareholder in the company), Rotterdam Authority, as well as a collection of shippers, exporters and buyers in the supply chain.
DP World
Based in Dubai, DP World is working on a permissioned blockchain system that aims to become the next global and universal trading platform. The company is working with freight forwarders, financial institutions, and a group of public and private entities in the United Arab Emirates to promote the adoption of its DLT platform.
A couple of its main agendas is to digitize exit and entry certificates required at the port and certificates of origin. By improving trust among participants in the logistics community, DP World aims to eliminate waste and improve efficiency.
CargoSmart
Since the global shipping industry requires collaborative efforts between participants, the Global Shipping Business Network has built up CargoSmart, a Hyperledger Fabric DLT framework for the shipping and logistics industry. At its core, CargoSmart comes with three layers: a business API layer, a blockchain persistence layer and a platform service layer. All three layers work together to offer encryption and digitalize the business model of companies in the supply chain industry while remaining compliant with government rules.
TradeLens
The collaboration between IBM and Maersk resulted in the creation of TradeLens, which is a trading platform for the supply chain. Users can share end-to-end supply chain documents and information, and they can store that information with guaranteed privacy and security. Built on the Hyberledger Fabric, TradeLens also offers a software-as-a-service solution to 200 members, most of which are corporates, banks, customs authorities and regional freight forwarders. Some of these 200 members include Agility, Southway Group and Namsung.
Security levels on TradeLens are such that entities know who they are dealing with. Smart contracts are deployed to automate the business process and increase trust, while cryptographic hashes are used to create original digital documents that cannot be duplicated.
Adoption is coming along
Emmanuelle Ganne, senior analyst at the World Trade Organization, told Cointelegraph: “DLT could bring global trade from the labor-intensive steam train age into the magnetic levitation train age that moves at high speed without friction,” adding:
“DLT has the power to break existing siloes and to replace the many handshakes needed to complete an international trade transaction by one single handshake, thereby removing inefficiencies and slashing costs.”
From a technical standpoint, and as seen through the examples mentioned above, DLT is ready to replace traditional transactional systems with efficient and transparent tools. However, regulation is still standing in the way, creating a major bottleneck in the adoption process.
Related: Trade finance: The latest industry to boost DLT adoption amid COVID-19
Deepesh Patel, editorial director at Trade Finance Global — a trade finance platform — told Cointelegraph: “Most banks have not yet seen meaningful support from authorities to facilitate trade on digital terms, and we urge governmental authorities and policymakers around the world to address these historic and wildly outdated laws.”
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Blockchain
The new ‘Bank of England’ is ‘no bank at all’
Published
4 Minuten agoon
Dezember 29, 2020By
As one of the first countries to industrialize in the 1760s, Britain’s manufacturing revolution instigated one of the greatest practical and ubiquitous changes in human history. But even more extraordinary than the cultural shift itself, is the fact that Britain’s industrialization remained way ahead of potential competition for decades. Only in the early 1900s did historians come to grips with the issues of causation. Max Weber’s pithy answer, “the Protestant work ethic,” pointed to Puritan seriousness, diligence, fiscal prudence and hard work. Others point to the establishment of the Bank of England in 1694 as a foundation for financial stability.
In contrast, continental Europe lurched from one national debt crisis to another, then threw itself headlong into the Napoleonic wars. Unsurprisingly, it was not until after 1815 that industrialization took place on the European mainland, where it was spearheaded by the new country of Belgium.
250 years later, another revolution has begun with the launch of Bitcoin (BTC), but this one is more commercial in nature than industrial. Though the full impact has yet to play out, the parallels between these two historical events are already striking.
Bitcoin may not match the obviousness of industrialization, but the underlying pragmatics touch on the very foundations of the non-barter economy. Like the establishment of the Bank of England, the creation of the cryptocurrency infrastructure has been prompted by ongoing and worsening threats to financial stability: systemic fault-lines created by macroeconomic challenges stemming from the 2008 financial crisis.
If you can’t beat ‘em, join ‘em…right?
Where a central bank once anchored financial enlightenment, it now plays the role of antagonist. For those who could “connect the dots” in 2008, there was the realization that central banks no longer existed as guardians and protectors of national currencies, but rather as tools for creating politicized market distortions, abandoning their duty to preserve wealth in favor of creating the conditions for limitless, cheap government debt. While many of the underlying intentions were benign, the process inherently worked to punish savers and reward reckless debt.
Meanwhile, it has steadily taken time for the potential of digital assets to reach their potential and approach something like critical mass, though thankfully full acceptance shouldn’t take as long as Britain’s industrial revolution. Over the past 12 years, cryptocurrencies have moved from unknown to novel to significant, growing interest. As a result, profound changes are underway, affecting the mechanics by which investors, the investment industry, wealth managers and even the commercial banking sector are engaging with cryptocurrencies.
This interest has accelerated as we enter into a period of deep economic uncertainty and growing awareness that structural soundness is shifting away from traditional investment options. Not only that, this growing financial innovation and public interest has largely occurred outside of the central banks’ control, if not outright antagonism led by the banks’ regulatory arms in government.
Now, many central banks are trying to join a game they’ve tried almost every way of beating, with digital currencies that adopt the glowing sheen of crypto innovation, but which also eschew the underlying innovations and philosophy that made those innovations so popular to begin with.
Follow or get out of the way
The popularity of cryptocurrency has largely been due to its protean fungibility — it has been whatever the independent financial community has needed it to be, from digital currency to speculative financial instruments to smart contracts that can power smart financial technology.
However hard central banks might try to co-opt the hype of cryptocurrency, cryptocurrency succeeding will mark the fundamental end of critical aspects of the central banking monopoly by offering a more competitive vehicle for facilitating commercial transactions and providing a more stable medium to store monetized assets. Cryptocurrencies actually offer real returns on “cash” deposits, something that the fiat banking system has long since abandoned. Most of all, cryptocurrencies reveal the fictitious nature of fiat currencies as a principle.
Cryptocurrencies as an ecosystem will increasingly constrain, redirect and set the parameters for government macroeconomic policies. Certainly, sound alternatives to fiat currencies will drive the latter to the periphery of commercial life, concomitantly reducing the number of tools the nation-state has at its disposal to regulate or respond to changing economic conditions. Above all, this means that government financial engagement can no longer be a rule unto itself. It will have to engage by the same principles as everyone else. A level playing field here has dramatic implications.
Against the backdrop of the essential limits of fiat currencies, current geo- and macroeconomic policies and a new emerging world order, cryptocurrencies offer vast potential as an efficiency facilitating frictionless commerce and investment, a medium of stability against uncertainty and inflation, increased security in value transfer and wealth management, optimum autonomy in an increasingly intrusive climate, and “cash” asset preservation/growth in a world of negative interest rates.
The edifice that supports the concept of a “global reserve currency” is also weakening. This will reduce political influence over global finance, as well as nations’ abilities to run a long-term balance of payments deficits, current account deficits and borrow at little or no interest. Indeed, given current trends, changes in trading mechanics may speedily evolve to the point that such “reserve currencies” no longer have a function at all. And cryptocurrency success will hasten the end of the U.S. dollar monopoly in global commerce.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
James Gillingham is the CEO and a co-founder of Finxflo. James is engaged in developing and implementing strategic plans and company policies, maintaining an open dialogue with stakeholders and driving organizational success. He is an expert in managing and executing high-level strategic objectives with more than 13 years’ experience in building, developing and expanding multinational organizations. His deep knowledge of financial markets, digital currencies and fintech has played a pivotal role in his success to date.
Blockchain
Why you wouldn’t eat chicken nuggets, and why you shouldn’t trust Big Data
Published
10 Stunden agoon
Dezember 29, 2020By
Just like you might think twice about eating chicken nuggets once you see how they are made, you’d likely hesitate about volunteering your personal information once you see how it is used and monetized.
Freedom has become one of the world’s most commoditized assets — and over the years, the internet has eroded it.
We live in a world where we’re confronted with 5,000 words of terms and conditions when buying sneakers. Crucial details about what companies do with our data is buried in masses of legalese — prompting most of us to click “I agree” without thinking of the consequences.
In other cases, companies are unacceptably opaque about how our data is used. This is a big problem when businesses are offering their services for “free”… provided we can give our email address, phone number and a few other details.
A scene from the recent sci-fi series Maniac perfectly illustrated where the world is heading. A character is given a choice — they can either pay for their subway ticket or get it for free in exchange for some personal information. As you’d guess, they bluntly chose the latter.
That’s basically what we’re doing every day — giving our data to corporations, big and small, and sacrificing our privacy and freedom in the process.
It’s gotten so bad that individual states have had to step in with rules and regulations designed to protect the public, many of whom are unaware of what they’re signing up for when they tick a seemingly innocuous box on a website.
And it’s also telling that tech giants are worried about the taps being turned off. When Apple unveiled a new feature that would enable users to opt out of having their activity tracked across apps and websites, Facebook launched a ferocious PR campaign against the measures. The social network said it was speaking out to protect the small businesses who rely on its platform for targeted advertising. Cynics among you will see it as a brazen attempt to protect profits by a company charged with some of the most insidious and influential data mining in history.
Pandora’s box has been opened
The tide is beginning to change — because we’ve opened Pandora’s box — and the world is starting to have long-overdue discussions about the privacy we’re entitled to online.
For more than 10 years now, we’ve experienced abundant financial freedom thanks to Bitcoin (BTC) and its rivals… but there’s still a long way to go in other parts of our society.
Last week, I went to the shop and spontaneously bought some moisturizer, and when I got home, I did a Google search to learn more about the product. For the next seven days, I was bombarded with moisturizer ads on Facebook.
Just like our health, our well-being and our careers, freedom is an inner personal responsibility that we need to monitor, maintain and protect — especially in the digital realm, where it can all too easily be sold in exchange for access to free services.
To feel free and safe in our homes, we rely on the privacy of our ownership, and the trustworthiness of our friends and neighbors. Government laws and housing association rules underwrite this. But we also entrust our financial privacy to institutions — in the expectation that they will be held accountable by regulators and central banks — and the whole reason Bitcoin launched in 2009 was because our expectations weren’t being met.
Why blockchain is the answer
Every modern proof-of-stake blockchain tackles the problems surrounding digital privacy and trust in a unique way, and in these vibrant communities, decentralized governance helps to ensure that standards are upheld, with slashing mechanisms serving as a deterrent to those who are tempted to work against a network’s best interests.
With PoS blockchains, users benefit from informed consent. They’re kept in the loop about proposals for improving and expanding the network and ideas for new services. Digital social consensus means they can read debates about the pros and cons associated with each proposal, come to their own conclusions, and cast a vote accordingly. Can you honestly imagine a tech giant doing this?
Privacy issues can be solved by generating abstract network addresses that are not permanently tied to public keys — or through the use of special proxy smart contracts, which are similar to VPN and Tor but on top of the blockchain.
Can blockchain technology solve some of the most pressing privacy and trust issues seen in a generation? I believe so. Once the technology is there and transactions are cheap enough, consumers will be able to make a choice — share their private data or pay a small fee instead.
We need to learn harsh lessons from the past and make the right decision this time around. I remember the early days of email when spam messages were a big issue. A small sender’s fee was considered as a way of circumventing this problem — but in the end, the likes of Gmail came out on top. Now, there’s no monetary cost… we just pay the small price of Google hosting all of our electronic correspondence.
Proof-of-stake blockchains can deliver cheap transactions, decentralized governance that regulates the network’s rules, maximum privacy, and no data collection policies. Each story starts with trust — and in the blockchain world, the trust starts with the network.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Vladimir Maslyakov is the CTO of Thekey.space and former CTO of Exante.eu. He developed several distributed financial systems as an IT architect. He has been a blockchain enthusiast since 2012 and is an initial member of the Free TON community.
Blockchain
Crypto taxes, reporting and tax audits in 2021
Published
20 Stunden agoon
Dezember 28, 2020By
This year was like no other. Now that it has limped to a close and we look at the promise of a better 2021, it is time to think about taxes. Although there were many other notable things about 2020, there were some tax points to savor — and some to fear.
Gains and losses
It is hard to look at crypto and 2020 without commenting on gains and losses. Bitcoin (BTC) ballooned in price, making a lot of investors happy. Of course, if you had taken short positions, you are less content. And if you were invested in XRP, the news that the United States Securities and Exchange Commission is unhappy with XRP has caused some price impact in the unwanted direction. When it comes to real and perceived value and buying power, these developments matter. But what about taxes?
Related: SEC vs. Ripple: A predictable but undesirable development
Tax day delay: IRS more lenient?
Tax returns for 2020 are due on April 15, 2021, which is not too far away. Don’t count on a delay like last year. In 2020, the Internal Revenue Service gave us all a 90-day reprieve on return filing and payments, until July 15, 2020 (IRS Notice 2020-17). The world may still be in COVID-19’s grip during the upcoming tax-filing season, but most observers do not expect the same kind of latitude from the IRS when it comes to 2020 tax returns.
The same can be said for the IRS easing up on many of its enforcement activities. Early in 2020, the IRS Commissioner Chuck Rettig announced the “People First Initiative.” Need to pay your taxes in installments? The IRS will help because it has a well-worn process for working out installment payments. Plus, installment payments due between April 1 and July 15, 2020, were suspended, as were tax liens and levies. Even new passport debt certifications when delinquent tax debts exceed $50,000 were on hold, and most new tax audits were on hold, too.
How about now in early 2021? Many IRS employees are still working mostly remotely, but don’t assume that this means you are going to be cut some slack in early or mid-2021 that taxpayers received in 2020. It is highly unlikely. How about arguing with the IRS or in court that you shouldn’t have to pay IRS penalties because you were adversely impacted by the pandemic? You can try it, but the IRS commissioner has already pushed back hard on suggestions that the IRS should have a special pandemic allowance for penalties. Again, don’t count on it.
IRS forms for crypto taxes
Two years ago, the IRS made crypto a kind of everyman’s tax issue by adding a question to everyone’s tax return, and the same thing has happened with 2020 tax returns. It means that starting with 2019 tax returns filed in 2020, the IRS asks you a simple question:
“At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
It’s pretty simple: just yes or no; it does not ask for numbers or details, though that would go elsewhere on your tax return.
This addition for 2019 returns is being continued for the 2020 returns you file in 2021. In fact, you should assume it will be a standard feature of tax returns from now on. Because the IRS classifies crypto as property, any sale is going to produce either a gain or loss, and a yes or no box can turn out to be pretty important. In fact, given the IRS’ track record with offshore bank accounts, it could even mean big penalties or even jail.
The Department of Justice’s Tax Division has successfully argued that the mere failure to check a box related to foreign account reporting is willfulness. Willful failures carry higher penalties and an increased threat of criminal investigation. The IRS’ Criminal Investigation Division is even meeting with tax authorities from other countries to share data and enforcement strategies to find potential cryptocurrency tax evasion. This seems reminiscent of the foreign bank account question included on Schedule B.
If a taxpayer answers “No” and then is discovered to have engaged in transactions with cryptocurrency during the year, the fact that they explicitly answered No to this new question (under penalties of perjury) could be used against them. What if you just have a kind of “signature authority” over crypto owned by your non-computer-savvy parents or other relatives? That way, you can help them manage their crypto.
If you sell a parent’s crypto on their behalf, at their request and/or for their benefit, should you answer “Yes” or “No” to the question? Various escrow and trust arrangements — some informal, some not — have blossomed. They can be sensitive, particularly now with the IRS’ much greater access to information. But be careful of who is selling and how such activities are reported.
Should you attach an explanatory statement to the return explaining your relationship to the digital currency? There probably aren’t perfect answers to this question, but what is clear is that answering “No” if the truth is “Yes” is a big mistake. Skipping the boxes entirely might not be as bad, but it isn’t good either if the truth is “Yes.” If the truth is “Yes,” say so, and remember to disclose and report your income, gains, losses, etc. Maybe that’s the point of the question: to be a prominent reminder.
Other tax forms
Don’t think that your tax return is the only tax form you’ll see. Although crypto still escapes some reporting forms, that is much less true today than it once was. How about IRS Forms 1099-MISC, 1099-K, 1099-B or Schedule K-1? There’s even the new Form 1099-NEC for the 2020 tax return season.
All of these forms can and do report crypto payments and transactions. These forms arrive around the end of January for reporting payments or transactions made in the previous calendar tax year. Wages paid to employees in digital currency must be reported on a Form W-2 and are subject to federal income tax withholding and payroll taxes.
Salaries made in digital currencies made to independent contractors are taxable to them, and payers engaged in business must issue Form 1099-NEC. A payment made using a digital currency is subject to Form 1099 reporting just like any other payment made in property. That means if a person in business pays crypto worth $600 or more to an independent contractor for services, a Form 1099 is required.
If you receive any Forms 1099, keep track of them. Each one gets reported to the IRS (and state tax authorities). If you don’t report or otherwise address the reported income on your tax return, you can expect the IRS to follow up.
Transactions trigger taxes
In 2014, the IRS announced that crypto is property. If you have 100 BTC and you sell 10, which 10 did you sell? There is no perfect answer to this question. Most of the tax law considers shares of stock, not cryptocurrency. Specific identification of what you are selling, when you bought it, and for what purchase price is likely to be the cleanest. But that may not be possible. Some people use an averaging convention, where you essentially average your cost across a number of purchases. Consistency and record-keeping are important.
IRS audits and information access
The IRS uses software to track crypto and has also gotten access to records via other sources. Besides, with the forms 1099 and K-1 being issued, many reports are now being dropped in the IRS’ lap. That should be a cause for concern for taxpayers.
The IRS has crypto training now for its auditors and criminal investigation division agents. Should the latter scare you? I think so. The IRS and Department of Justice still bring criminal charges primarily involving crypto use for illegal purposes involving other crimes, such as money laundering or child pornography. But that is no guarantee.
Besides, most criminal tax cases historically come out of regular old civil IRS audits. The IRS auditor sees something it thinks is fishy and invites the criminals to the IRS to take a look. It’s called a referral, and you don’t know if it is happening. In fact, you usually don’t know until it is too late. If you forget to report your crypto gains in past years, then you ought to reconsider this. Don’t wait for the IRS to find you even if you did not get one of those 10,000 IRS crypto warning letters.
Taxpayers may think they will not be caught, but the risks are growing — and the best way to avoid penalties is to disclose and report as accurately as you can. IRS commissioner Chuck Rettig has even moved to increase criminal investigations, too, so be careful out there.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article is for general information purposes and is not intended to be and should not be taken as legal advice.
Robert W. Wood is a tax lawyer representing clients worldwide from the office of Wood LLP in San Francisco, where he is a managing partner. He is the author of numerous tax books and writes frequently about taxes for Forbes, Tax Notes and other publications.
‘Bullish year ahead’ — Bitcoin primed for Q1 2021 gains, strength index suggests
The new ‘Bank of England’ is ‘no bank at all’
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