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Vermont would hold on to its reputation as an innovator in blockchain legislation with a recently introduced bill that would regulate and tax cryptocurrency transactions in the state.
The bill ( S. 269), introduced Jan. 3 by Sen. Alison Clarkson (D), would allow newly formed digital currency LLCs to operate digital currency systems like Bitcoin in Vermont and tax them at a penny per transaction.
Under the bill, a digital currency LLC would pay the state “in the form of its digital currency a transaction tax equivalent to $0.01, at the then current exchange rate for the currency with the U.S. dollar,” for each unit of currency mined or created and on each sale or transfer of that currency.
The company would have to maintain a physical presence in the state in order to be taxed, the bill said, and would be exempt from all other applicable taxes.
Clarkson told Bloomberg Tax that the bill is meant to help “build Vermont’s fluency in financial technologies, to unleash 21st century opportunities in our state.”
But for the private sector to safely use cryptocurrency, she said the state has to “provide a regulatory framework in which cryptocurrency can thrive, which would be supported by a light transactional tax.”
The bill is pending in the Senate Committee on Economic Development, Housing and General Affairs, where Clarkson serves as vice-chair. If enacted, the bill would take effect July 1.
Vermont was the first state to pass blockchain legislation in 2015, according to Heather Morton, program principal in fiscal affairs for the National Conference of State Legislatures (NCSL).
Cryptocurrency like Bitcoin requires blockchain technology to exist. A blockchain is a distributed database that is used to maintain a continuously growing list of records, called blocks. Each block contains a link to a previous block and a time stamp. Each block is visible to the buyer and the seller in a digital version of a double-entry bookkeeping system.
Vermont is considering “the first bill I have seen that would impose a transaction tax on digital currency transactions,” Morton told Bloomberg Tax in an email. Morton has tracked national legislation on blockchain and cryptocurrency as far back as 2003.
Vermont is one of five states—including Arizona, Delaware, Illinois and Nevada—that have enacted or adopted blockchain legislation, she said. In 2016, the Vermont General Assembly passed a law that created the evidentiary standards to determine the authenticity of records using blockchain technology within the state’s rules of evidence.
Nevada passed a law in June 2017 that promotes blockchain technology for electronic transactions, placing the definition of blockchain into state statute and incorporating transactions conducted over a blockchain into the state’s Uniform Electronic Transactions Act. Nevada’s law also protects businesses using blockchains from being regulated or taxed by local governments.
Amy Kim, global policy director and general counsel for the Chamber of Digital Commerce, a Washington-based trade group, said taxing cryptocurrency transactions sends a bad message to this emerging industry.
“We wouldn’t want to see these transactions be taxed. We wouldn’t want them to be treated differently than any other transactions,” she told Bloomberg Tax. “I think you see some states taking a restrictive approach, while others are looking to help foster the industry in their states.”
At the behest of the Vermont General Assembly, the Center for Legal Innovation of Vermont Law School released a financial technology report in December 2017 recommending that state lawmakers “act carefully but still boldly in developing a legislative response to the opportunities and concerns raised” by blockchain in particular.
The report “suggests that the proper response is to encourage Vermont enterprise to get ahead of the curve, and to provide the legal frameworks within which successful innovation by both established players and new entrants can occur.”
Beyond cryptocurrency, blockchain can be used for many other applications, Morton said.
“Other evolving applications can include online voting, medical records, insurance policies, property and real estate records, copyrights and licenses, and supply chain tracking,” she wrote in a November 2017 NCSL legislative brief on blockchain.
“Most states don’t want to be the first through the door,” attorney Ethan Wilson, NCSL’s policy director for commerce & financial services, told Bloomberg Tax. “I think most states are a little timid in this space. But some of them view it as an opportunity. They want to foster this type of innovation—they don’t want to stymie it.”
So far in 2018, 10 states have introduced blockchain legislation, Morton said, including California’s proposed Virtual Currency Act and an Arizona bill that would allow taxes to be paid in cryptocurrency.
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Text of S. 269 is at http://src.bna.com/vxj.
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