Navigating the Complexities of Taxing Cryptoassets: A Multifaceted Challenge

Taxation within the realm of cryptoassets and transactions involving cryptocurrencies presents a formidable and intricate challenge for both the tax and regulatory sectors. The complexity is underpinned by multiple factors, chiefly the intricate classification and characterization issues associated with cryptoassets. Moreover, the inherently flexible nature of cryptoassets, allowing for considerable restructuring in terms of origin, issuance, division, redemption, and more, further compounds this challenge.

Yet, an equally significant factor contributing to the complexity and potential inconsistency in taxing cryptocurrencies across various jurisdictions is the intriguing comparison with fiat currency or traditional money.

Understanding the Distinctions and Overlaps

To comprehend the intricacies of taxing cryptoassets, it's vital to explore the fundamental characteristics of fiat currency or traditional money. Money, in its fiat form, is distinguished by three core traits: it serves as a unit of account, a store of value, and a medium of exchange.

Debatably, cryptocurrencies, including specific crypto assets, may not unconditionally align with these three principles. There is room for debate regarding whether they effectively function as a unit of account, a store of value, and a medium of exchange. This leads to an instinctive inclination to reject a direct comparison or similarity between crypto and traditional money.

However, it's imperative to acknowledge that the crypto community, characterized by a diverse array of crypto assets, may embrace these novel instruments as a medium of exchange, a store of value, and a unit of account. Consequently, they could be viewed as akin to money. Some jurisdictions have already bestowed legal tender status or foreign currency recognition upon certain cryptocurrencies, further blurring the boundaries.

An Exploratory Path Forward

To gain deeper insights into the apparent disparities between fiat currency and cryptocurrencies, a comprehensive exploration of this subject is essential. Gieve below  succinct comparison delving into this exploration, shedding light on the complexities and nuances that define the taxation landscape concerning cryptoassets.

In conclusion, the intricacies of taxing cryptoassets stem from a confluence of classification challenges, the flexible nature of cryptoassets, and the nuanced comparison with traditional fiat currency. Striking a balance that addresses these complexities is a pressing concern for the tax and regulatory domains, necessitating ongoing dialogue and in-depth analysis to develop effective tax frameworks within this evolving landscape.

 

 Difference between Fiat Currency and Crypto¹ 

 

Basis	Fiat Currency	Crypto
Issue	Issued centrally by an institution i.e., central bank.	Issued by a decentralized network of computers
Supply	Money supply is controlled and influenced by external factors. Generally, it is decisions taken by humans.	Supply is based on an algorithm. For example, one can know how many bitcoins will be in circulation, e.g., in a month, a year, or in a decade from now.
Distribution	Fiat money can be multiplied at will, has no upper limit.	Certain crypto assets have a limited supply. For example, there will ever only be 21 million bitcoins.
Intermediary	Fiat money can only be transferred by using intermediaries (e.g., banks, credit card companies, PayPal, Apple).	There are no intermediaries involved in most of the crypto cases (there have been new crypto cases where the operational protocols have been modified to make the originator an intermediary);
Risk of censorship / loss	·       Since fiat money is transferred electronically through intermediaries, a transaction may be prevented by an intermediary, often for legal reasons (e.g., the application of money laundering regulations, sanctions or restrictions on capital movements).   ·       With fiat money, bank balances can be lost through seizure, expropriation or insolvency of the bank.	·       Since cryptos are transferred without using intermediaries, nobody can prevent a transaction from occurring, so that this payment system is censorship-resistant.           ·       Cryptocurrencies, on the other hand, are not claims against an intermediary and as long as the private key is not disclosed, the cryptocurrency cannot be accessed (this is different when a user decides to

		entrust an exchange to hold the cryptocurrency).
Time	Opening a bank account for fiat money is a lengthy process, due to, among other things, the need to comply with legal provisions on money laundering and taxation.	In contrast, with cryptocurrency, the generation of an address (which is similar to a bank account number) and the corresponding private key (which is similar to a PIN code securing the bank account) is a mathematical operation, which does not require the consent of a third party.
Transfers abroad	With fiat money, transfers abroad are slower and more expensive than domestic transfers.	Cryptos are electronic money systems that know no national boundaries; there is no distinction between domestic and foreign addresses.
Reversibility	In    the    case        of       fiat        money, remittances are often reversible.	With cryptocurrencies, on the other hand, transactions are mostly irreversible.
Tracking/Trail	With fiat money, there is no database that tracks the fate of every single bill and coin.	On the other hand, transactions with Cryptos are recorded in a public ledger (the blockchain).
Divisibility	Fiat money is divisible to two decimal places (to hundredths).	In contrast, Bitcoin (Cryptos) are divisible to eight decimal places (to hundred millionths), with the smallest unit being called a ‘Satoshi’ or a ‘Sat’ in honor of the pseudonymous founder.
Security	The security of fiat currencies is maintained by central banks, the police, the public prosecutor’s office, courts, safes, money transporters, and specialized printing presses.	In contrast, the security of Cryptos is purely based on mathematics (cryptography).