Should governments allow paying taxes in cryptocurrencies?

taxation, infrastructure development, and cryptocurrencies

Alberto Asquer is Director of MSc Public Policy & Management (on campus and distance learning) and MSc Public Financial Management (on campus and distance learning) programmes at the School of Finance and Management at SOAS. In this blog post he introduces ideas that can be studied in more in detail within the core and optional programme modules, including: taxation, infrastructure development, and cryptocurrencies.

In late November 2018, the press reported that the State of Ohio started allowing taxpayers to pay taxes in cryptocurrencies. Earlier in 2018, the State of Sao Paulo in Brazil expressed its interest towards using a cryptocurrency to pay for infrastructure development design services. But are such initiatives well-grounded or do they just succumb to the hype that surrounds cryptocurrencies since the late 2017?

The case for cryptocurrencies

Cryptocurrencies have been variously received so far. Some enthusiastically embrace the computational breakthroughs of Satoshi Nakamoto, the mysterious inventor of the bitcoin, as an opportunity to expropriate central banks’ monopoly of money issuance.

Others passionately warn users and investors to keep away from cryptocurrencies because of the risks of speculative manipulations and plain scams.

The attitude of public authorities – from the governments to central banks and financial regulators – has been more circumspect so far. On the one hand, experimentation with cryptocurrencies has been tolerated – if not exhorted or embraced – because of the prospect of advantages that could arise from financial innovations. On the other hand, cryptocurrencies may result in unintended effects that are not too easy to discern at present, like for example the possibility that they pose threats to the stability of the financial system if their diffusion increases or the one that they facilitate tax evasion or crime.

The decision of the Ohio Treasurer, therefore, seems to mark one further step towards increased legitimacy and circulation of cryptocurrencies.

The willingness of a public authority to accept bitcoin or alt-coins for paying taxes bears an important symbolic and practical value. The possibility to use a cryptocurrency to fulfil tax liabilities, in fact, conveys the important signal that everyone can accept the cryptocurrency as a means of payment because, in any case, it would be accepted by the state government. In principle, this could help encourage individual and businesses to transact in cryptocurrency.

The case against cryptocurrencies

On the other hand, there are still various impediments to the adoption of cryptocurrencies as a means of payment. Most business activity is priced in the domestic currencies, like the US dollars, rather than in bitcoin or alt-coins. When individuals and businesses use a cryptocurrency to settle transactions, they convert prices denominated in the domestic currency into the cryptocurrency of their choice.

As the exchange rate between domestic currencies and cryptocurrencies is extremely volatile, then any party who receives a certain amount in a cryptocurrency is not safe that they can convert it back into a commensurable amount of domestic currency later on. Most individuals and businesses would prefer to avoid the risk of loss out of cryptocurrency-to-domestic currency conversion rate fluctuations.

The State of Ohio seems to share the same concern, in fact they promptly convert taxes collected in cryptocurrency into dollars through an exchange. This means that the State government does not spend part of the budget in the cryptocurrencies that they collect.

This does not help the circulation of the cryptocurrencies in the local economy, but the State would carry considerable exchange risk if they hold cryptocurrencies over time. Despite the openness that governments may have towards cryptocurrencies, then, it seems that they still must treat bitcoin and alt-coins with extreme prudence.


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