Before there was software available for people to do their taxes, there was only one way to submit a tax return – on paper. After some time, the number of electronic tax returns coming in greatly outnumbered paper returns. Tax authorities had to train their employees and adjust the way that they did business, but the result was a faster and more efficient way of performing checks and balances. It became easier for the IRS and other tax collection authorities across the globe to collect taxes, initiate audits, and distribute payments. Tax authorities are now looking to see if cryptocurrency, and specifically, blockchain technology can revolutionize their systems once more.
How Cryptocurrency Confuses Tax Authorities
When it first started emerging that cryptocurrency even existed on a wide scale, tax authorities panicked. They realized that they were not able to accurately estimate or collect taxes as it was not possible for them to track encrypted online financial transactions. There was more focus put on cryptocurrency, particularly the technology behind how it worked. Tax authorities the world over wanted to know exactly what blockchain was, how they could crack it, and in the end, how it could benefit them.
Now they have more options to change the way that taxes are processed thanks to the genius of blockchain. Blockchain is nothing more than a computer generating a code or sequence that makes up a tiny fragment of a financial record. Dozens of computers are needed to complete a blockchain. This made it so that cryptocurrency become a reality instead of just a possibility, but the technology itself is promising to tax authorities as well as innovators.
Governments Are Paying Closer Attention to Cryptocurrency
Today, anyone who makes a profit via cryptocurrency is fully expected to declare their earnings on their tax returns. Reporting is still done on an ‘honor system’ but tax collectors and auditors are more well-versed in cryptocurrency in general. It is much easier for them to look at bank accounts and notice patterns of withdrawals and deposits that may be connected to cryptos. As governments pay closer attention to cryptocurrency, they are either looking for more ways to get their share of the pie, ban it outright, or seize its technology.
For example, India’s government has all but brought buying or selling cryptocurrency to a standstill. Its residents can certainly ignore the rules and look for ways to work around the restrictions, but they also put themselves at grave risk.
Blockchain Can Be an Ally to Tax Authorities
The most interesting part of cryptocurrency technology for tax authorities is the way that blockchain works on a macro level. Companies have to expend a good deal of their profits towards payroll, accounts receivable and payable, and staying current on owed taxes. They can now get regular updates on cryptocurrencies to learn the current value. Keeping track of valuations can help you to accurately pay tax estimates in the future. Because blockchain operates via peer-to-peer networks, it could, in theory, at least work around the clock to keep the books balanced for businesses. Tax authorities would then be able to get a much more detailed record in real time from the businesses they collect from. Using blockchain technology to track transactions would totally change how federal and state level tax authorities operated.
Following the Money
Another reason government tax authorities want to utilize blockchain technology is that it has the ability to give them nearly unfettered access to books and financial records instantaneously. Instead of it taking months to complete an in-person audit, a business owner could simply use blockchain to complete all financial transactions and then send those records over. Tax authority personnel could scan over said records looking for irregularities in minutes instead of days. Using blockchain would make it harder for tax dodgers to effectively get away with fraud. As other financial institutes are reportedly looking into using blockchain themselves, regular everyday people would benefit from being more protected while also having their pertinent records becoming more comprehensive.
People are already using their computers to log onto the internet and populate places such as social media platforms. Without a cooperative effort from millions of users, there would be no content to peruse. With blockchain technology, lots of users are needed to complete and power transactions. Most of the time these transactions are completed on the back-end, kind of how file transfers took place on peer-to-peer music sharing networks years ago. Blockchain technology can make it easier for tax authorities to do their jobs while also saving businesses a lot in overhead costs.