The essence of Libra is that Facebook hopes consumers across the world will spend money in a new cryptocurrency. Its exchange rate against local fiat currencies will inevitably fluctuate. That creates a novel problem for consumers: each time they transact, they’ll be making a currency gain or loss. In most countries gains will be taxable, meaning consumers will have to file a detailed tax return showing all their transactions and the exchange rate at the time, and pay any tax due. This seems to us to be a significant barrier to wide adoption.
While many regulators have struggled to define exactly what cryptocurrency is, tax authorities have not generally had that problem. Whatever it is, the taxman doesn’t care: gains and losses are taxable in almost all countries. Whether early adopters of bitcoin have actually paid the tax due is a different question, and whilst some cryptocurrency exchanges are now reporting account-holders to tax authorities, some still are not. The decentralised nature of cryptocurrencies makes this a difficult problem to solve, although the relatively limited adoption means it has not been a top priority for most governments.
Libra is very different. On one hand, its intended wide adoption presents a greater threat to tax authorities than any previous cryptocurrency; but on the other hand, the fact that Libra operates on a different model makes it a much easier problem for tax authorities to solve. Instead of adopting the decentralised model of Bitcoin and other cryptocurrencies, the Libra Blockchain will be governed by the ‘Libra Association’, a not-for-profit organisation made up of a range of businesses including Facebook, MasterCard, Visa and PayPal among others. This means that unlike Bitcoin et al, for Libra there will be a ‘central authority’ with oversight over users’ transactions. We expect tax authorities will ultimately require the Libra Association to report on its users’ transactions, either under existing domestic and international frameworks (e.g. the CRS or FATCA), semi-voluntary schemes (like Airbnb’s new agreement with the Danish tax authority) or under new legislation.
So, consumers and businesses probably won’t be able to ignore the tax treatment of Libra.
For consumers, if Libra rises in value between the time they acquire Libra and the time they spend it, then the consumer will have made a gain which most countries will tax; if Libra falls, the consumer will have made a loss (which could ordinarily be set against Libra gains). This will generally be the case regardless of whether the consumer is actually making a gain or loss in economic terms. For example, if a shop prices its goods/services in Libra and it does not adjust the price as the exchange rate fluctuates, the consumer won’t make any economic gain or loss when they spend Libra – but in most countries there will still be a deemed gain/loss for tax purposes.
A consumer will therefore have to track the point that he or she acquires Libra, the point at which he or she spends it, and the exchange rate each time. If the overall result across a tax year is positive, tax will have to be paid. For a typical UK consumer, the compliance will be more painful than the actual tax (given the UK’s generous £12,000 annual allowance for tax-free capital gains). For consumers in other countries, actual tax liability is much more likely (as France, Germany and others have much more limited, or zero, annual allowances).
For businesses, accepting Libra will result in them suffering two taxable events: first, upon receiving Libra from consumers (i.e. ‘normal’ tax on trading profits, which would have happened if they had received fiat currency); and second, upon either converting Libra back to fiat assets or spending the Libra with another Libra-accepting business (profit/loss/gain on the ‘disposal’ of Libra). Again, this will have to be tracked, which will add an unwanted additional layer of tax compliance.
While some of these issues may be mitigated by the fact that Libra is intended to be relatively stable, we would nevertheless expect it to be at least as volatile as a conventional fiat currency. In any event, there is usually no de minimis in tax law and heavy users of Libra are likely to find computing their tax liability a real challenge, with a capital gains computation required for a potentially large number of transactions occurring throughout the tax year. (One might ask why these issues don’t arise at the moment when people spend money in foreign currency. The answer is that most countries don’t charge tax on personal foreign currency transactions conducted abroad.)
This seems to us a big problem for Libra to solve. How many consumers will be willing to deal with a new level of tax compliance, and potential tax liability?
A political solution: Libra could lobby governments and tax authorities to create a special exemption from tax on Libra gains and losses. However, the chances of reaching such a global agreement seem slight: why should Libra be treated any differently from a ‘real’ currency? And why would tax authorities agree to potentially miss out on taxing users’ gains? And if governments did agree to this, would this breach state aid/anti-subsidy rules?
A tech solution: Libra could integrate a user education program and automatic tax calculation and reporting systems to make the process as straightforward as possible for consumers and tax authorities and taxpayers. But the prospect of an unexpected tax bill at the end of the year could still be off-putting to many consumers, and it would simply highlight to users the relative advantage of transacting in local currency instead of Libra.
A market solution: Don’t operate Libra in countries where the tax treatment for consumers is awkward (or, alternatively, operate it, but don’t expect largescale take-up). It might be thought that tax authorities in the developing world (clearly a significant Libra target) would take a more lenient approach than tax authorities in the EU or the US. That seems to us an unsafe assumption – particularly for countries used to applying capital controls to prevent outflows from their economy.
A more fundamental solution: Change Libra so that, instead of being a new currency, it is essentially an e-wallet system. A UK consumer spends £50 to buy £50 of Libra, and spends pounds in UK stores. A French consumer spends €50 to buy €50 of Libra, and spends euros in Eurozone stores. And so on. When spending in a different currency, FX conversions are made instantaneously at the point of transacting. All the tax complexities melt away, but so does the uniqueness of the proposition – and this would be a significant reversal from what has been announced.
Finding a solution which meets both Libra’s apparent aspirations and the needs of its intended users does not appear to be straightforward. If Libra is to launch in 2020 as expected, the Libra Association will need to move quickly to solve these issues in order to ensure that it delivers the seamless experience users have come to expect from Facebook and its other founding members.
The essence of Libra is that Facebook hopes consumers across the world will spend money in a new cryptocurrency. Its exchange rate against local fiat currencies will inevitably fluctuate. That creates a novel problem for consumers: each time they transact, they’ll be making a currency gain or loss. In most countries gains will be taxable, meaning consumers will have to file a detailed tax return showing all their transactions and the exchange rate at the time, and pay any tax due. This seems to us to be a significant barrier to wide adoption.
While many regulators have struggled to define exactly what cryptocurrency is, tax authorities have not generally had that problem. Whatever it is, the taxman doesn’t care: gains and losses are taxable in almost all countries. Whether early adopters of bitcoin have actually paid the tax due is a different question, and whilst some cryptocurrency exchanges are now reporting account-holders to tax authorities, some still are not. The decentralised nature of cryptocurrencies makes this a difficult problem to solve, although the relatively limited adoption means it has not been a top priority for most governments.
Libra is very different. On one hand, its intended wide adoption presents a greater threat to tax authorities than any previous cryptocurrency; but on the other hand, the fact that Libra operates on a different model makes it a much easier problem for tax authorities to solve. Instead of adopting the decentralised model of Bitcoin and other cryptocurrencies, the Libra Blockchain will be governed by the ‘Libra Association’, a not-for-profit organisation made up of a range of businesses including Facebook, MasterCard, Visa and PayPal among others. This means that unlike Bitcoin et al, for Libra there will be a ‘central authority’ with oversight over users’ transactions. We expect tax authorities will ultimately require the Libra Association to report on its users’ transactions, either under existing domestic and international frameworks (e.g. the CRS or FATCA), semi-voluntary schemes (like Airbnb’s new agreement with the Danish tax authority) or under new legislation.
So, consumers and businesses probably won’t be able to ignore the tax treatment of Libra.
For consumers, if Libra rises in value between the time they acquire Libra and the time they spend it, then the consumer will have made a gain which most countries will tax; if Libra falls, the consumer will have made a loss (which could ordinarily be set against Libra gains). This will generally be the case regardless of whether the consumer is actually making a gain or loss in economic terms. For example, if a shop prices its goods/services in Libra and it does not adjust the price as the exchange rate fluctuates, the consumer won’t make any economic gain or loss when they spend Libra – but in most countries there will still be a deemed gain/loss for tax purposes.
A consumer will therefore have to track the point that he or she acquires Libra, the point at which he or she spends it, and the exchange rate each time. If the overall result across a tax year is positive, tax will have to be paid. For a typical UK consumer, the compliance will be more painful than the actual tax (given the UK’s generous £12,000 annual allowance for tax-free capital gains). For consumers in other countries, actual tax liability is much more likely (as France, Germany and others have much more limited, or zero, annual allowances).
For businesses, accepting Libra will result in them suffering two taxable events: first, upon receiving Libra from consumers (i.e. ‘normal’ tax on trading profits, which would have happened if they had received fiat currency); and second, upon either converting Libra back to fiat assets or spending the Libra with another Libra-accepting business (profit/loss/gain on the ‘disposal’ of Libra). Again, this will have to be tracked, which will add an unwanted additional layer of tax compliance.
While some of these issues may be mitigated by the fact that Libra is intended to be relatively stable, we would nevertheless expect it to be at least as volatile as a conventional fiat currency. In any event, there is usually no de minimis in tax law and heavy users of Libra are likely to find computing their tax liability a real challenge, with a capital gains computation required for a potentially large number of transactions occurring throughout the tax year. (One might ask why these issues don’t arise at the moment when people spend money in foreign currency. The answer is that most countries don’t charge tax on personal foreign currency transactions conducted abroad.)
This seems to us a big problem for Libra to solve. How many consumers will be willing to deal with a new level of tax compliance, and potential tax liability?
A political solution: Libra could lobby governments and tax authorities to create a special exemption from tax on Libra gains and losses. However, the chances of reaching such a global agreement seem slight: why should Libra be treated any differently from a ‘real’ currency? And why would tax authorities agree to potentially miss out on taxing users’ gains? And if governments did agree to this, would this breach state aid/anti-subsidy rules?
A tech solution: Libra could integrate a user education program and automatic tax calculation and reporting systems to make the process as straightforward as possible for consumers and tax authorities and taxpayers. But the prospect of an unexpected tax bill at the end of the year could still be off-putting to many consumers, and it would simply highlight to users the relative advantage of transacting in local currency instead of Libra.
A market solution: Don’t operate Libra in countries where the tax treatment for consumers is awkward (or, alternatively, operate it, but don’t expect largescale take-up). It might be thought that tax authorities in the developing world (clearly a significant Libra target) would take a more lenient approach than tax authorities in the EU or the US. That seems to us an unsafe assumption – particularly for countries used to applying capital controls to prevent outflows from their economy.
A more fundamental solution: Change Libra so that, instead of being a new currency, it is essentially an e-wallet system. A UK consumer spends £50 to buy £50 of Libra, and spends pounds in UK stores. A French consumer spends €50 to buy €50 of Libra, and spends euros in Eurozone stores. And so on. When spending in a different currency, FX conversions are made instantaneously at the point of transacting. All the tax complexities melt away, but so does the uniqueness of the proposition – and this would be a significant reversal from what has been announced.
Finding a solution which meets both Libra’s apparent aspirations and the needs of its intended users does not appear to be straightforward. If Libra is to launch in 2020 as expected, the Libra Association will need to move quickly to solve these issues in order to ensure that it delivers the seamless experience users have come to expect from Facebook and its other founding members.
.tmb-editorspic.jpg?sfvrsn=df04ab27_1)
