The House Ways and Means committee draft of the infrastructure bill is out, and it contains a number of provisions at the intersection of tax and technology. One such provision, the Credit for Operation and Maintenance Costs of Government-owned Broadband, provides for credits to governmental entities that incur costs for “qualified broadband expenses,” which are amounts paid or incurred for the provision of broadband services to qualified households. Qualified households being those low-income households (as defined under Section 45D(e)) that did not have access to said services prior to the start of the taxable year.

This reliance on Section 45D effectively ties the broadband program on to the New Market Tax Credits program. One potential issue here is that there have been several high profile examples of “low-income” tracts actually being anything but — the Blackstone Hotel in downtown Chicago comes to mind. Attention will need to be paid to the program moving forward to ensure it remains in line with its legislative purpose.

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TLDR: Bitcoin (or other cryptocurrency) mining is subject to income tax, typically as ordinary income. Your basis in the coin is the price of the coin at the time it was mined. There are no like-kind exchanges for coins, so selling one coin to buy another is a taxable transaction. Any gains over your basis are capital gains, and may be long term or short term depending on the period of time you held the coin for.

Mining

The Wall Street Journal recently reported the IRS is forcing cryptocurrency exchanges to give up names of customers in order to pursue unpaid taxes on mined and arbitraged coins. This reporting is, for many, likely the first they have heard of a tax on cryptocurrency. While there is no cryptocurrency-specific tax, you should consider mining the equivalent of a part-time independent contractor job for tax purposes – your employer is not taking taxes out of your paycheck, and it is your duty to report your earnings. Similarly, the buying and selling of coins is not dissimilar from the buying and selling of stocks. Taxes on ordinary income and capital gains, respectively, will apply. 

In 2014 the IRS issued IRS Notice 2014-21, which clarified that a taxpayer that mines crypto currency must take the value of the virtual currency as of the date of mining as gross income. A mined coin is a taxable event and thus carries with it income tax implications. Mining must be voluntarily reported as, in general, successfully mined coins are not reported to a taxing authority in the same way income via employment is.

Selling cryptocurrency, even to purchase another coin, gives rise to another taxable event. The difference between your basis in the original currency and what you sell it for will determine whether you have a capital gain or a capital loss. Capital gains can be either short term or long term, depending on the period of time the asset (here, the coin) had been held. Capital gains will be taxed at the capital gains rate, which differs from ordinary income, and capital losses can be used to offset capital gains with some limits and restrictions. 

Deductions can be taken, generally, for costs inherent in mining – things like electricity, equipment, and repairs. 

Care must be taken to keep accurate records and report income earned in mining on-time and precisely. This article is not tax advice and is not legal advice. If you reached this page just searching for information and you don’t have a tax issue, I hope it has been helpful. If you believe yourself to owe taxes, don’t rely on information you find on the internet. Consult a tax attorney. If you have any questions feel free to get in contact. 

It seems as part of the tax overhaul, the Modi government is looking in to taxing bitcoin and other cryptocurrency. Some time ago the Indian government announced the creation of an interdisciplinary committee to prepare a report and recommend policies for cryptocurrency. 

The impact of the GST on cryptocurrency remains to be seen. The main question will be whether it is deemed a currency -- which would mean indirect taxes don't apply -- or essentially assets being used for bartering. 

The attraction of the latter option appears to be the relative simplicity. Rather than integrating and regulating bitcoin, it would merely be taxed under the new goods and services tax schema. Cryptocurrencies would be traded like gold, on registered exchanges monitored for illegal activity. The line that is being walked appears to be between blanket legalization with the preservation of the anonymity of distributed ledger cryptocurrencies and blanket illegalization, an unpopular option. 

The list of countries in which cryptocurrencies are illegal is not a long one: Bangladesh, Kyrgyzstan, Ecuador, Bolivia, and a few others. If India opted to illegalize cryptocurrencies, it would be the largest market to do so. 

The Delaware Senate has voted Senate Bill 69 out of Committee, moving a step closer to permitting the use of networks of electronic databases ("distributed ledgers") for the creation and maintenance of corporate records.

I have previously discussed the concept of distributed ledgers. The Senate bill would permit corporations to authorize, issue, transfer and redeem shares through distributed ledgers. This would ensure that, in the eyes of the state of Delaware, corporations issuing shares through blockchain are not breaching their fiduciary duty by doing so. 

If you haven't already heard of the Delaware Blockchain Initiative, you soon will. A proposed amendment to the Delaware General Corporation Law (DGCL) could revolutionize the way corporate finance is handled in Delaware and, as Delaware is the state of incorporation for more than three-quarters of the Fortune 500, the country at large.

What is a Blockchain?

A blockchain, in its use in finance, is essentially a decentralized and distributed ledger. In systems where physical pieces of currency aren't being handed back and forth like gold doubloons, the most pressing problem is keeping track of transactions. As digital currency is, at base, an electronic file that can be replicated without limit, the issue of double-spending becomes a concern. Double-spending occurs when one unit of currency is both spent and retained by the spender. With physical currency, this is not a significant problem – if there are 100 pennies in a system and, at the end of the day after all trading has completed, everyone counts their pennies, there will only be 100 pennies distributed amongst the traders. Individual traders may feel that they should have more pennies than they do, and indeed some thievery may have occurred between them, but the system itself will not be fooled. Thus digital currency must first tackle the problem of ensuring an accurate accounting of not only individual participant holdings, but the amount of currency in the system as a whole.

A blockchain can be most accurately described as a distributed or decentralized ledger. Digital currency that utilize blockchain systems take advantage of the same technologies as peer-to-peer file sharing systems. A peer-to-peer file sharing system has no centralized server that houses all of the data that is being shared. Instead, the data on the individual users' systems is shared with all of the other users of the system. For file sharing, this makes it difficult for law enforcement to crack down on copyright infringement. For digital currency, this ensures that there is no one source of data that, first, needs to be maintained by some oversight entity and, second, can be compromised.

When a transaction occurs, a transmission is made from the sending and receiving parties' currency system of choice, to the rest of the nodes, or users, on the system. It essentially transmits a message stating "Party A has paid Party B X amount." Individual nodes then confirm that this data is accurate – at base, that Party A has the funds to transfer to Party B and confirms the new amounts held by each party. Once confirmed, groups of these transactions are bundled together in to "blockchains" and distributed to the nodes of the system. In essence, imagine a blockchain as a notebook in which transactions are continually scrawled. When a notebook is filled, millions of copies of it are instantly made and distributed to all of the users of the currency. This ensures that, if someone tampers with a transaction in their notebook, the tampering comes out the next time the notebook is compared with all of the copied notebooks – the next time there is a transaction.

In addition to this distribution system, the innovation inherent in many digital currencies that use a blockchain system is that the units of currency exist only in the blockchains. In other words, whereas in a traditional ledger you would be writing down Party X gave $10 to Party Y and, after that writing, there would exist both the ledger and the $10 in Party Y's pocket, in most digital currency systems there is no currency that exists separate from the blockchain. Rather than opening your wallet to retrieve $10 to hand over to a seller for an item, with these digital currency systems you merely indicate to the distributed and decentralized ledger, the blockchain, that the 10 units that were attributed to you are now attributed to the seller.

How Can Blockchain Technology Impact Business?

In addition to the obvious potential for a shift in the way currency is handled, two exciting potential avenues for blockchain technology are distributed ledger shares and smart contracts.

Distributed ledger shares operate in much the same way that blockchain currency does. All participants in a particular market for shares share a single, decentralized database. Trades can be executed instantly and at any time, as there is no third party oversight. The added security and operational efficiency can substantially reduce transaction costs and, as a result, change the entire face of investment.

Smart contracts are contracts that can autonomously update, delete or otherwise be interfaced with when a specific condition is met, like an expiration or payout date. In essence, they are digital transaction protocols that can automatically execute the terms of a contract. The thought is that common contractual obligations can be handled automatically, without the need for human intervention, and thus substantially lower transaction costs. If an ordinary contract defines the rules of the road and outlines the penalties of violating them, a smart contract does the same but also automatically enforces the rules and reduces the likelihood of needing to pay penalties. Enforcement is decentralized through a blockchain in the same way that digital currency is: it is February 31, millions of people agree that it is February 31, and millions of people agree that our contract states you will pay me $50 on February 31; so on February 31, $50 is taken from your account and transferred to mine.

What is the Delaware Blockchain Initiative?

The Delaware Blockchain Initiative (DBI) is an attempt by the state to become more friendly to blockchain businesses and adapt its regulatory state to emerging technology. Then-Governor Markell launched the DBI in May of 2016, aiming to create a regulatory and legal environment for the development of blockchain technology and embrace its ability to reduce transaction costs. The Governor highlighted four facets of the state intiative.

First, to ensure that Delaware's regulatory environment is welcoming and enabling by observing the industry as it develops. The key here will be to walk the line between codifying an evolving and nascent industry at a point in time where it hasn't fully developed and failing to support an emerging technology. Best practices will need to be determined with the fully input of the community, industry, and consumer groups.

Second, to ensure that an appropriate legal infrastructure is in place for the oversight of a distributed ledger share system. Too much interference and innovation is stifled, too little interference and investors and companies are hesitant to get involved as they feel unprotected.

Third, an Ombudsperson, Andrea Tinianow, was named as the State Director of Corporate and International Development. A member of the Global Delaware Concierge Team, Ms. Tinianow is tasked with working with investors, entrepreneurs and executives to help ensure the DBI is a success.

Fourth, the Governor committed the state government to using blockchain technology, and announced that the Public Archives project would be the first entity on board. The Delaware Public Archives will use blockchain technology to archive and encrypt government archives. This will help not only ensure their security, but double as a backup and disaster recovery system.

Conclusions

Blockchain technology is promising, there is no doubt. All indications appear to be that it is gaining increased acceptance and adoption, and the important of Delaware throwing its weight behind the technology cannot be overstated. However, blockchain technology and the digital currency systems that use it are not without their detractors and black eyes. Bitcoin, the most famous digital currency, is viewed by many as the currency of the black market. Technology advances quickly, and it remains to be seen if blockchain technology can overcome its stigmas and gain widespread adoption before the next revolution in payment and ledger systems is developed. In either case, however, it appears Delaware is situating itself to be ready to cash in.