4. QUESTION ANALYSIS
Classify
virtual
currency?
Property which also acts as a
currency
Tax virtual
currency?
Dependent on specific situation
Enforce tax
policies?
- Repercussions for noncompliance
- Methods for identifying fraud
How should Uqana:
4
5. ENVIRONMENTAL EVALUATION
External Analysis
• Canada, U.S., Japan
& Obala’s policies
• Bitcoin’s volatility
Internal Analysis
• Significant portion of
Bitcoin supply
• Inability to centralize
Bitcoin regulation
5
6. TAX POLICY OPTIONS
Property
• Capital gains tax
• Missed tax
opportunities
Currency
• Income tax, sales
tax, and
employment tax
• Fails to
recognize bitcoin
as an investment
6
7. TAX POLICY OPTIONS
No Regulation
• No use of
resources
needed
• No tax revenue
Property-
Currency Hybrid
• More
comprehensive
tax coverage
• Requires
stricter
compliance
7
9. SCENARIO: COMPUTER PURCHASE
9
Purchase value 1,470.00$
Hybrid sales tax revenue 279.30$
Est. profit per computer 411.60$
Hybrid 139.94$
Corporate Income Tax
Sales Tax
Change in bitcoin value 50.00$
Hybrid capital gainstax revenue 32.70$
Capital Gains Tax
Individual Corporate
10. COMPARISON OF TAX REVENUE BY METHOD
Currency Property Hybrid
944.24$ 27.52$ 976.82$
Total Tax Revenues
11
11. INFORMATION REPORTING
Individual
• Income tax &
Withholdings
• Capital gains
Corporate
• Sales tax
• Corporate Income
tax, including
capital gains
Online Educational Resource
11
12. ANONYMITY & DEALING WITH TAX VIOLATORS
Risk of being
caught
Peer
reporting
Payment
processors
Bitcoin
exchange
markets
High
penalties
12
13. RISKS & MITIGATION
13
Decrease of
bitcoin usage
Bitcoin is still
anonymous with
policy
Complexity Works well with
current values
Tax evasion Penalties and
procedures in place
14. IMPLEMENTATION TIMELINE
14
Discuss and
decide on
optimal tax
solution
October 2014
Create committee to
create tax code
December-January
2014-15
Delegate tax
duties to
departments
April 2015
Review system
processes to identify
areas of improvement
June-December 2016
Implement
virtual currency
tax codes
May 2015
• Release information recording
and reporting methods
• Publish educational website
Tax collection on
virtual currencies:
Year 1
May 2016
Implement
system
improvements
January 2017
16. APPENDIX
Earning Bitcoins Example
Individual Income & Employment Tax
Transaction Example
Sales Tax
Capital Gains Example
Capital Gains Tax
Corporate Revenue Example
Corporate Income Tax
Comparison of Taxes
Annual Revenue Excel Model
How Other Countries Handle Bitcoin
Bitcoin Knowledge
Why a Hybrid?
Alternate Methods to Link Identity to Bitcoin
Address
Expansion of Linking Identity to Bitcoin Address
Bitpay
Peer Reporting
Bitcoin Tax Revenue Model
Self-Employment Tax Method
Employment Tax Method
17. HOW OTHER COUNTRIES HANDLE BITCOIN
America
• Property
• Different
types of
information
reporting
Canada
• Property
• Subject to
same
reporting
requirements
Japan
• Non-
currency
• Taxable item
Other
Countries
• Finland:
Commodity
• Germany:
Private
money
• China:
Restricted
A11
18. BITCOIN KNOWLEDGE
• Mining
• Bitcoins are released in blocks
• Acquired by recording other transactions on
ledger
• Mining hardware
• Wallet
• Keeps bitcoins in users accounts
• Allows convenient transactions
• Also involves QR codes
A13
19. WHY A HYBRID?
Capital asset (property held by taxpayer)
Not included in end-of-year inventory, not sold to customers in ordinary course of trade or business, not
applicable to property used in trade or business
Treating bitcoin as solely a capital asset does not address some of the most important manners in which it is
used, such as a method of payment for work or a transaction
Currency
Uqana does not keep its books and records in bitcoins, so therefore it is not a currency
Bitcoin has properties of both a capital asset and a currency and it cannot be used to its full potential
unless that is recognized by Uqana
Allows for the most tax revenue to be collected
A12
20. ALTERNATE METHODS TO LINK IDENTITY TO BITCOIN
ADDRESS
Publishing name and bitcoin
address online – anyone on the
internet knows
• Users will post address online
hoping others will send them
bitcoins
• Online forever – easy to look up
with a search engine
Using a thin client or hosted
wallet – server administrators
know
• Thin clients don’t have local copy
of block chain, must run queries
• Additional info provided to wallets
can lead to identity
• Both can leak IP address and
address to third parties
Using bitcoin without encrypted
VPN or Tor - your internet
provider knows
• ISP can determine which
transactions belong to your IP
address
Bitcoin.info
• Administrators (i.e. Roger Ver)
with your personal information and
bitcoin address can choose to
publish it at any time
Server records can be hacked
and leaked on internet
A3
21. EXPANSION OF LINKING IDENTITY TO BITCOIN ADDRESS
Bitcoin exchanges
• Subject to money laundering regulations
• Government IDs, bank statements, utility bills required for
identification
Online merchants and payment processors
• Receipt of online transactions will include name and shipping
address
• Payment processors such as Coinbase and Bitpay will have
transaction details and personal information
A4
22. BITPAY
Roger
Ver:
virtual
currency
millionaire
Accepts bitcoins and converts them immediately to cash
Can be implemented into a business that would like to accept
bitcoins but convert a portion or all into cash – better than a credit
card because % charged is 1% rather than 3-4%
Converts to many currencies, i.e. Euro, Yen, Yuan Krona
Would be very willing to include Uqana’s currency due to the
significant amount of bitcoins held (3.62%)
23. PEER REPORTING
• Someone can report you, which
happens more often than people think
• People get jealous and might get
tempted to make sure justice is served if
they know you’re avoiding regulation on
your bitcoins
Why peer
reporting
helps deal
with tax
violators
A5
24. BITCOIN TAX REVENUE MODEL
A6
• Rounded to $350 USD/bitcoin for model purposes
Based on bitcoin value as of October 19, 2014:
$387.27 USD = 1 bitcoin
• Tax rate at this income level: 15%
Assumption: miner makes the Uqana average income
per year: $19,000
• similar to buying stock
There is no tax on the actual purchase of bitcoins
25. SELF-EMPLOMENT TAX METHOD
Self-
employment
tax
Assuming that miners
have another source
of income
No rate stated, using
individual tax rate
Miner adds bitcoin
fair market value to
income for taxing
Not subject to
withholdings tax
A1
27. EARNING BITCOINS EXAMPLE
A7
Performs
mining work
Bitcoin
worth $350
USD
Earns 10
bitcoins =
$3,500 USD
Miner would be required
to record bitcoins earned
and equivalent amount
in USD at the time of
earning
Income tax: $3,500 x
15% = $525
28. INDIVIDUAL INCOME & EMPLOYMENT TAX
Bitcoin user mines bitcoins: Individual
income tax
Employer pays employee in
bitcoins: Employment tax
28
Bitcoins mined 10
Value per bitcoin 350.00$
Total $ value earned 3,500.00$
Tax Revenues by Method
Total earned 3,500.00$
Income tax rate 15%
Currency 525.00$
Property -$
Hybrid 525.00$
29. TRANSACTION EXAMPLE
Pays 4.2 bitcoins
for the computer,
priced at $1,470
not including sales
tax
Sales tax: $1,470
x 19% = $279.30
Total price comes
to $1,749.30
(equivalent to
4.998 bitcoins)
Miner decides to use 5
bitcoins, currently worth
$1,750 to buy a
computer (from
Overstock.com)
Miner pays in bitcoins,
and keeps the rest in his
bitcoin wallet
A8
30. SALES TAX
Bitcoin user makes purchase after time
has passed: Sales Tax
30
Tax Revenues by Method
Purchase value 1,470.00$
Sales tax rate 19%
Currency 279.30$
Property -$
Hybrid 279.30$
Dollar value per bitcoin 400.00
Sales tax in bitcoins 0.70
31. Sales tax: $1,470
x 19% = $279.30
Computer price:
$1,749.30
(equivalent to
4.372 bitcoins)
Capital gain:
((4.372 bitcoins x
$400) - (4.372
bitcoins x $350)) =
$218.60
Capital gain tax:
$218.60 x 15% =
$32.79
CAPITAL GAINS EXAMPLE
A9
Miner waits 1 month to
make purchase
Bitcoin value has
appreciated to $400
(from the initial $350)
There is a sales tax and
a capital gain tax
32. CAPITAL GAINS TAX
32
Bitcoin user realizes capital gain from transaction: Capital Gains Tax
Purchase value: computer 1,470.00$
Value per bitcoin 400.00
Total bitcoins before tax 3.68
Total: after sales tax 1,749.30$
Total bitcoins spent 4.37
Original bitcoin value 350.00$
Capital gain per bitcoin 50.00
Total capital gains: before tax 183.75
Total capital gains: after tax 218.66
Tax Revenue by Method
Currency -$
Property
Total capital gains: before tax 183.75$
Capital gains tax rate 15%
Total capital gains tax 27.56$
Hyrbid
Total capital gains: after tax 218.66$
Capital gains tax rate 15%
Total capital gains tax 32.80$
33. CORPORATE REVENUE EXAMPLE
Company receives payment with bitcoin and the revenue needs to be taxed
In our example, Overstock.com receives 3.675 (worth $1,470) bitcoins for payment of laptop, not accounting for
the sales tax since that is not part of revenue and instead is received by the government
Companies record sales in dollar amount at time of purchase due to the volatility of bitcoins
This needs to be accurately done by all companies
Referenced average Apple profit per Mac
$1323.40 average selling price per Mac
28% gross profit margin for Macs from Jefferies & Co.
Profit of $370.55 per Mac
Sourced from appleinsider.com
Average Apple profit then scaled up to accommodate the example’s computer price
Computer price: $1470
Profit from computer: $411.60
Corporate revenue tax: $411.6 x 34% = $139.94
A10
34. CORPORATE INCOME TAX
Corporation makes profit on Bitcoin
sale: Corporate Income Tax
34
Purchase value: computer $1,470.00
Est. profit per computer 411.60
Tax Revenues by Method
Est. profit per computer 411.60$
Corporate income tax rate 34%
Currency 139.94$
Property -$
Hybrid 139.94$
35. COMPARISON OF TAXES
Currency Property Hybrid
Income tax 525.00$ -$ 525.00$
Sales tax 279.30 - 279.30
Capital gains tax - 27.52 32.58
Corporate tax rate 139.94 - 139.94
Total 944.24$ 27.52$ 976.82$
Comparison of Tax Revenue by Method
11
36. ANNUAL REVENUE EXCEL MODEL
GDP $2,500,000,000,000.00 $2,500,000,000,000.00
Total BC* $485,000.00 Personal Earnings as %of GDP 30%
BC Value $385.00 Personal Earnings as %of GDP$750,000,000,000.00
Total BC Value $186,725,000.00 Bitcoin as %of GDP 0.00746900000%
Percent of GDP 0.0074690%Bitcoin Earnings as %of GDP $56,017,500.00
BC Tax Earnings $10,643,325.00
BC Tax Rate 19%
37. ANNUAL REVENUE EXCEL MODEL
All number as %of GDP
Personal Income Corp. Inc. Tax Capital Gains Sales Tax
16,244,600,000,000.00 As %of GDP As %of GDP As %of GDP
28,051.00
316,128,839.00
8,867,730,062,789.00 1,982,950,000,000.00 487,338,000,000.00 4,873,380,000,000.00
55% 12% 3% 30%
15,404,812.50$ 7,618,380.00$ 840,262.50$ $10,643,325.00
Total
34,506,780.00$
Editor's Notes
Scott
Scott
Qual+Quant- mention risk mitigation
Hannah
Our goal is to ensure our recommendations will address the values of the UMC, UCB, and USEC as well as the concerns of the Uqana Department of Department of Federal Revenue
Our goal – to present a tax model solution for the use of bitcoins in the Uqanian economy taking into account government’s and officials’ values
Mention the importance of bitcoin in the country – accounts for 3.62% of all bitcoin activity
(not a history of the country/bitcoin)
Mention the department (USEC, UMC, UCB) concerns
SO… mention our goal – to present _____ while keeping in mind said concerns
Mention Innovative, Rodrigues known for no corruption
Carvalho-political aspects?? – how do we get people to comply
Hannah reads off questions, Megan does responses
Virtual currency should be classified as a property per given definitions. Virtual currency is treated as a currency for tax purposes in situations in which it is used in transactions.
What is the current environment surrounding Uqana and virtual currency?
What are the possible ways to treat virtual currency, and which is optimal for Uqana? (Include Full year figure slide)
What are possible risks and associated mitigations?
How can Uqana implement this optimal solution?
What results can Uqana expect from this solution?
**Disclaimer: we may refer to bitcoin in examples, however these policies/recommendations can apply to all types of foreign currency
Megan
Dislike Japanese lack of regulation b/c of bitcoin importance
Best of both worlds, better tax code, possible negative effects
Btc is volatile (neg) yet remains popular (pos)
Last Remark: Tying together how both come together to “help” our idea
Strength to mention: capable government systems are already in place
Miranda
Property: Treating bitcoins solely as a property for tax purposes sees tax revenue from capital gains from citizens, but misses other tax opportunities as mentioned in currency classification. These taxes are…
Currency: involved in transactions with bitcoins rather than solely their investment purposes which is where this classification misses out.
No Regulation:
Hybrid:
By definition, it fits more as a property rather than a currency. However, its traits as a currency should not be ignored especially for tax purposes.
Miranda
Property: Treating bitcoins solely as a property for tax purposes sees tax revenue from capital gains from citizens, but misses other tax opportunities as mentioned in currency classification. These taxes are…
Currency: involved in transactions with bitcoins rather than solely their investment purposes which is where this classification misses out.
No Regulation:
Hybrid:
By definition, it fits more as a property rather than a currency. However, its traits as a currency should not be ignored especially for tax purposes.
Miranda
To best explain our tax policy, we will take you through a few examples which describe the taxation policies in action for each taxable situation.
Employment tax would also be taxed as a currency in a similar manner. But the company may be taxed for capital gains depending on the change in bitcoin value from when the bitcoins were first received. Furthermore, witholdings may be taken out at each pay period. The way this would work is the company calculates the earned wages in dollar value, subtracts the withholdings and income tax and then pays the employee in an equivalent amount of bitcoins to the wage earned, depending on the bitcoin value at that period in time. Our reasoning for not calculating this figure is the lack of information regarding Uquana’s withholdings.
Lauren
$350 - $400
In this example here, the bitcoin user purchases a computer with the bitcoins he earned from mining. The first tax that has to be accounted for is sales tax, which in this case bitcoin will be treated as a currency. The sales tax (19%) can be calculated off the purchase price in dollar amount then converted to the equivalent amount of bitcois at the time of purchase.
Based on the current sales tax rate in Uqana….
….Regardless of when the user purchases the computer, the sales tax will remain the same. However if time passes and the value of bit coin changes, a capital gains tax will need to be taken into account.
Both happen simultaneously, note: BC value same for both
Lauren
Here we have a comparison of the total tax revenue Uqana could receive under each tax policy option in our given example. It is clear that our suggested hybrid policy allows for the greatest possible tax revenue collection. If bitcoin depreciates over a period of time, tax revenue under the hybrid model would be equal to that under the currency model, but never less. If bitcoin appreciates over a period of time, the tax revenue under the hybrid model will be significantly greater.
Megan will now discuss information reporting.
Megan
We can’t change the bitcoin process, so we need to deal with anonymity rather than try to create a new system. Users will be responsible to report their own transactions and capital gains or losses. Educating users on how to record bitcoin and pay related taxes will help the government see more success in tax collection. It is also important to inform BTC users to keep track of certain information along the way, ie time and value of BTC acquisitions and transactions.
This shows a breakdown of different taxes that individuals and corporations are responsible for.. The operations support sector of the federal department of revenue would be responsible for creating these systems.
Scott and Hannah
We’re associating punishment and Revenue collection with Carol Johnston and the UMC (Uqana Monetary Council).
Penalty for evading taxes should be a high enough percentage that the risk of being caught and paying the penalties (even jail-time) will prevent the majority from committing tax fraud (they should already have penalties in place for tax fraud)
There are ways to get around anonymity by retrieving information from retailers(appendix slide on article “7 ways to get around anonymity”)
Government can reach out to exchange markets who have information identifying bitcoin users, as well as ISPs, Corporations/payment providers
If people find out when other people get away with tax fraud, they will report it because of the high competitiveness and jealous of the bitcoin market.
Miranda
Decrease of Usage: our policy ensures that the anonymity of bitcoin is not compromised, and that is a benefit that will keep consumers using bitcoins. As long as they are complying with their taxes, users can stay anonymous in what they are using their bitcoins for
Complex policy: Beyond keeping values of the current government, the benefits of this policy in giving your government more revenue will outweigh the risks of it potentially becoming complex. We have laid out a simplified explanation of what these policies mean and how to implement them and by providing this info to you as well as your citizens, this policy is something that can be easy to understand and does not need to be seen as complicated.
Lauren
Here is a snapshot of the opportunistic future of virtual currency tax policy in Uqana. May of this coming year is our projected time frame for implementing the tax policy, with the first full year collection beginning in May of 2016. The months thereafter would serve in reviewing and improving the system set in place at that time.
With the successful implementation of our suggested tax policy, Uqana would have the ability to generate greater tax revenue and therefore improve the economic environment in which it operates, all while keeping in tact the most important characteristic of virtual currency; anonymity.
Scott will now conclude our presentation.
Other events? Leave anything out?
Review: Audit suspicious activity?- at this point they should have a good idea of some people not paying, ie rat out tips
Implement: Awk bullets? Other steps?
Committee: Should we tell them to create a committee or straight get to creating tax code
Release information recording and reporting methods
Publish educational website
US: 1099, w-2, wages
Japan: against regulation of BTC, Mnt Gox
Not a commodity
Not a unit of account
Someone can report you, which happens more often than people think
People get jealous and might get tempted to make sure justice is served if they know you’re avoiding regulation on your bitcoins
Based on bitcoin value as of October 19, 2014: $387.27 USD = 1 bitcoin
Rounded to $350 USD/bitcoin for model purposes
Assumption: miner makes the Uqana average income per year: $19,000
Tax rate at this income level: 15%
There is no tax on the actual purchase of bitcoins (similar to buying stock)
Self-employment tax
We’re assuming that the miners have another job besides mining bitcoins
Didn’t want to create a new tax rate so we decided that miners would apply the individual tax rate that they already follow to their bitcoin gains from mining
miner would be required to record bitcoins earned and equivalent amount in USD at the time of earning to be taxed appropriately
Regular employment tax
Amount of money earned over pay period is calculated and then converted to appropriate bitcoin equivalent at time of payment
Subject to withholding taxes and is the responsibility of the employer
Initial mining: income tax – bitcoins treated as CURRENCY
Performs mining work
Bitcoin worth $350 USD
Earns 10 bitcoins = $3,500 USD
Miner would be required to record bitcoins earned and equivalent amount in USD at the time of earning
Income tax: $3,500 x 15% = $525
Miranda
To best explain our tax policy, we will take you through a few examples which describe the taxation policies in action for each taxable situation.
Employment tax would also be taxed as a currency in a similar manner. But the company may be taxed for capital gains depending on the change in bitcoin value from when the bitcoins were first received. Furthermore, witholdings may be taken out at each pay period. The way this would work is the company calculates the earned wages in dollar value, subtracts the withholdings and income tax and then pays the employee in an equivalent amount of bitcoins to the wage earned, depending on the bitcoin value at that period in time. Our reasoning for not calculating this figure is the lack of information regarding Uquana’s withholdings.
If miner were to make purchase immediately: sales tax – bitcoins treated as CURRENCY
Miner decides to use 5 bitcoins, currently worth $1,750 to buy a computer (from Overstock.com)
Had the miner purchased computer the same day as earning the bitcoins
Pays 4.2 bitcoins for the computer, priced at $1,470 not including sales tax
Sales tax: $1,470 x 19% = $279.30
Total price comes to $1,749.30 (equivalent to 4.998 bitcoins)
Miner pays in bitcoins, and keeps the rest in his bitcoin wallet
Lauren
$350 - $400
In this example here, the bitcoin user purchases a computer a month later after the value of bitcoin has appreciated from 350 to 400. The first tax that has to be accounted for is sales tax, which in this case bitcoin will be treated as a currency. The sales tax can be calculated off the purchase price in dollar amount then converted to bitcoin at the time of purchase.
Scott will now talk about the capital gains aspect of this same transaction.
Both happen simultaneously, note: BC value same for both
Miner actually waits 1 month to make purchase: sales tax and capital gain tax – bitcoins treated as both CURRENCY and PROPERTY
Miner waits 1 month to make purchase
Bitcoin value has appreciated to $400 (from the initial $350)
Sales tax: $1,470 x 19% = $279.30
Computer total price (including sales tax): $1,749.30 (equivalent to 4.372 bitcoins)
Capital gain: ((4.372 bitcoins x $400) - (4.372 bitcoins x $350)) = $218.60
Capital gain tax: $218.60 x 15% = $32.79
Buying/selling bitcoins
same situation as capital gain (mention in appendix)
Scott
Scott
Lauren
Here we have a comparison of the total tax revenue Uqana could receive under each tax policy option in our given example. It is clear that our suggested hybrid policy allows for the greatest possible tax revenue collection. If bitcoin depreciates over a period of time, tax revenue under the hybrid model would be equal to that under the currency model, but never less. If bitcoin appreciates over a period of time, the tax revenue under the hybrid model will be significantly greater.
Megan will now discuss information reporting.
