The Facebook-led Libra Association rethinks its plans for a digital currency, but taxing problems remain.
In July 2019, Facebook and others announced ambitious plans to create a new cryptocurrency (‘Libra 1.0’). The aim was for Libra 1.0 to be used globally by consumers and businesses as a means of exchange. However, users would have faced significant tax headaches and potential costs.
Libra 1.0 proposed that its value would have tracked a basket of fiat currencies, so the value of a Libra against any single fiat currency would inevitably have fluctuated over time. As cryptocurrencies are regarded as chargeable assets for CGT purposes, users would have needed to compute their capital gain/loss each time they transacted, creating a potential tax cost at the worst, and a compliance headache at the least. The Libra Association would also likely be required to report on its users’ activities, meaning that tax authorities would ultimately have oversight of any capital gains made (see 'Facebook’s Libra currency: the tax issues ahead', Tax Journal, 8 July 2019).
Last week, the Libra Association published version 2.0 of its white paper (‘Libra 2.0’). At its heart is a move away from a single multi-currency-backed cryptocurrency and a move towards adding ‘stablecoins’ which are ultimately backed by, and reflect the value of, specific fiat currencies (so, a LibraGBP backed by GBP, a LibraUSD backed by USD, and so on.)
If the value of a LibraGBP accurately tracks the value of GBP, then many of the tax issues we previously identified would disappear: if one LibraGBP always has the same value as one GBP, then there is no prospect of a user making a capital gain in GBP terms when transacting in LibraGBP. This, however, relies on a rather large assumption: that one LibraGBP will always be valued at exactly one GBP. That may be true if the Libra Association/Facebook operate a fully-backed exchange through which any user can buy or sell one LibraGBP for one GBP at any time. However, if it is possible for the value of a LibraGBP to fluctuate in GBP terms (as many other ‘stablecoins’ do, such as USDT), then the potential for taxable capital gains would remain a significant obstacle to its widespread adoption.
Moreover, users transacting in non-native stablecoins (e.g. UK consumers transacting in LibraSGD) would also be subject to capital gains rules on their transactions, though this would also be true if they transacted in SGD directly (although ‘foreign currency’-related exemptions such as TCGA 1992 s 269 may not apply to stablecoins).
The proposal for a multi-currency-backed coin – and the tax problems previously identified with it - have also not disappeared entirely. The white paper still envisages a separate multi-currency cryptocurrency, made up as a ‘digital composite’ of single-currency stablecoins. The tax issues with this remain unresolved: the value of a multi-currency LBR will inevitably fluctuate against GBP in GBP terms, and users will be exposed to the same tax headaches as were evident on the Libra 1.0 proposal. This may be a particular problem for users in jurisdictions without a native LBR stablecoin (who, if they use Libra, will be forced to use either the multi-currency coin or a non-native Libra stablecoin – either of which could potentially result in capital gains rules applying).
Version 2.0 of the Libra white paper does not mention ‘tax’ at all. One can only speculate on whether its authors have tried to resolve the tax problems with the initial proposals, or whether they regard tax as something they can ‘move fast and break’. If the latter, unhappy consequences for Libra and its users seem likely.
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Libra 2.0: taxing problems remain
The Facebook-led Libra Association rethinks its plans for a digital currency, but taxing problems remain.
In July 2019, Facebook and others announced ambitious plans to create a new cryptocurrency (‘Libra 1.0’). The aim was for Libra 1.0 to be used globally by consumers and businesses as a means of exchange. However, users would have faced significant tax headaches and potential costs.
Libra 1.0 proposed that its value would have tracked a basket of fiat currencies, so the value of a Libra against any single fiat currency would inevitably have fluctuated over time. As cryptocurrencies are regarded as chargeable assets for CGT purposes, users would have needed to compute their capital gain/loss each time they transacted, creating a potential tax cost at the worst, and a compliance headache at the least. The Libra Association would also likely be required to report on its users’ activities, meaning that tax authorities would ultimately have oversight of any capital gains made (see 'Facebook’s Libra currency: the tax issues ahead', Tax Journal, 8 July 2019).
Last week, the Libra Association published version 2.0 of its white paper (‘Libra 2.0’). At its heart is a move away from a single multi-currency-backed cryptocurrency and a move towards adding ‘stablecoins’ which are ultimately backed by, and reflect the value of, specific fiat currencies (so, a LibraGBP backed by GBP, a LibraUSD backed by USD, and so on.)
If the value of a LibraGBP accurately tracks the value of GBP, then many of the tax issues we previously identified would disappear: if one LibraGBP always has the same value as one GBP, then there is no prospect of a user making a capital gain in GBP terms when transacting in LibraGBP. This, however, relies on a rather large assumption: that one LibraGBP will always be valued at exactly one GBP. That may be true if the Libra Association/Facebook operate a fully-backed exchange through which any user can buy or sell one LibraGBP for one GBP at any time. However, if it is possible for the value of a LibraGBP to fluctuate in GBP terms (as many other ‘stablecoins’ do, such as USDT), then the potential for taxable capital gains would remain a significant obstacle to its widespread adoption.
Moreover, users transacting in non-native stablecoins (e.g. UK consumers transacting in LibraSGD) would also be subject to capital gains rules on their transactions, though this would also be true if they transacted in SGD directly (although ‘foreign currency’-related exemptions such as TCGA 1992 s 269 may not apply to stablecoins).
The proposal for a multi-currency-backed coin – and the tax problems previously identified with it - have also not disappeared entirely. The white paper still envisages a separate multi-currency cryptocurrency, made up as a ‘digital composite’ of single-currency stablecoins. The tax issues with this remain unresolved: the value of a multi-currency LBR will inevitably fluctuate against GBP in GBP terms, and users will be exposed to the same tax headaches as were evident on the Libra 1.0 proposal. This may be a particular problem for users in jurisdictions without a native LBR stablecoin (who, if they use Libra, will be forced to use either the multi-currency coin or a non-native Libra stablecoin – either of which could potentially result in capital gains rules applying).
Version 2.0 of the Libra white paper does not mention ‘tax’ at all. One can only speculate on whether its authors have tried to resolve the tax problems with the initial proposals, or whether they regard tax as something they can ‘move fast and break’. If the latter, unhappy consequences for Libra and its users seem likely.
