taxes

Paying Taxes With Crypto


I caught a story this morning on DeCrypt regarding Miami-Dade County considering accepting Bitcoin to pay property taxes. While the step is long overdue given the fact that BTC and other coins are fast becoming alternative means to pay for goods and services in the private economy, the tax side of the equation has a whole bunch of ramifications I'm sure regulators are staying up at night thinking about.

Miami-Dade County Logo

First, there's a huge value difference between crypto and fiat currency when it comes to government revenue. For governments, currency stability is a good thing. High fluctuation in a base currency can create really ugly situations quickly in economic policy, especially when inflation gets involved. All one has to do to understand the potential risk is look at what happened the German Mark after World War I or South American countries in the 1970s. Stability in a currency is a very good thing in government planning because the process of collecting, tabulating and allocating government funds tends to be very rigid and inflexible. No one wants to be budgeted so many million or billions in a program only to find out the next day its worth pennies and people have to be furloughed because the agency can't even keep the lights on with the utility service invoice overdue.

Second, the process of conversion of crypto to government fiat income will be absolutely necessary in any kind of payment tool. Accepting other forms of payment versus cash or a check/warrant is not new. Government has been processing electronic payments and credit card payments for years through third part payment processors. However, what people don't realize is the immense amount of reconciliation involved doing so. The deposit and reconciliation records of the payment process are one set of data. The transfer of monies to the actual government bank account is a second set. The final reconciliation with the agency's accounting books is the third set. All three have to be reconciled daily, weekly and monthly to insure all payment transactions are up to date, accurate, and matched. Otherwise, bad accounting things happen. This takes a tremendous amount of work to apply and, unlike private companies who can own all the pieces, government typically has different offices and parties involved in the various steps of electronic payment processing. That means there are multiple databases that have to be synced by real people managing the transfer and true-up of data from one step to the next. Add in crypto, and now there's a fourth layer of reconciliation to apply in the mix.

Image of a gold coin in hand

Stock Image from PikWizard

Third, government income accounting and budgeting are all built around fiat currency. Think of it as the native language. Everyone speaks the same language which makes the system work cohesively from deposit and collections to fund management to budgeting to appropriation to expenditure records and financial statements. In each element, they all use the same fiat currency as the unit of measurement. Add in crypto, and one of two things has to happen: you're adding in a second element of unit measurement or the crypto has to be converted. Most will say just convert the crypto to fiat at the point of payment. That's doable; as the deposit hits the government's wallet, it can then be converted to fiat and taken out of the blockchain and added to real fiat dollar balances. There's a fee, of course, but it's a cost of service. Where the hitch is, however, comes with the value changes before, during and after conversion.

Let's say I get billed $10,000 in property taxes annually for a home in Miami. It's extreme, but go with the example for moment. If I pay property taxes of $10,000 with BTC, then from my perspective, I've paid a $10,000 bill at that point that my BTC leaves my wallet and arrives in the government's wallet. However, if the government doesn't transfer that BTC out to convert it there and then, the related agency BTC wallet balance could change significantly. Let's say BTC does a massive swan dive and drops from its current $60,000/coin to $23,000/coin. That's a 62% drop in value in moments, which could happen. Is the payment I made to the government now only worth $3,800? No, I have a record of receipt and payment, so as a taxpayer I should be good. At the time of payment, the coin was worth $10,000 and the government accepted. However, for the tax agency it's not so good. The record of payments shows an income of $10,000. However, by the time the payment is transferred off BTC blockchain and into fiat, 62% of value is gone and the government only has $3,800 in income which it projected should be $10,000 for the annual collection period. Multiply this situation by thousands of homes in a jurisdiction all paying with crypto. It could literally spell insolvency for a government budget expecting $10,000 per home and allocating appropriations for the next operating cycle based on the same.

While crypto is all fine and good for private dealings, I'm reticent to support the idea of using it for government income. Knowing the fundamental fact of how slow government moves in its own finance, without an instant conversion tool government crypto payment mechanisms would open up municipalities and agencies to fast currency changes they do not have the responsiveness to handle. And in the realm of politics everyone would be too busy finger-pointing to fix anything quickly when that happens. Ultimately, we would all suffer as government programs are then compromised by financial instability on the government accounting side. Keep the two separate with government staying on fiat. We're not ready for public money crypto until there is at least a government-backed dollar crypto to convert to versus accepting other coin types.

 

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tlutzenberger
tlutzenberger

A professional freelance writer for the last 20 years and a budding photographer by hobby.


The Intersect of Crypto Musings & Consumer Impacts
The Intersect of Crypto Musings & Consumer Impacts

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