In this new age of various digital assets such as cryptocurrencies, tokens, digital currencies and NFT’s, it is imperative that a suitable financial reporting system is implemented as large organizations start to incorporate these assets into their balance sheets, according to Michael Adegbite, an expert in the taxation of digital assets.
Adegbite, a first-class graduate in Accounting & Finance from Nottingham Trent University defines a digital asset as a digital representation of value recorded in a cryptographically secured distribution instrument or similar technology. He emphasized that over the past few years, there have been numerous events that have necessitated the need for an adequate reporting framework. Most recently, the introduction of a new digital currency, the “E-Naira” by the Central Bank in October 2021.
He added that the prevalence and continuous adoption of cryptocurrencies by large organizations has necessitated the need for an adequate framework to ensure that assets are accurately represented on company’s balance sheets to maintain the transparency and accountability of the stock market. Adegbite also cited the collapse of the well-known cryptocurrency exchange, FTX Trading Ltd led by Sam Bankman-Fried as a significant warning of the consequences of disregarding the need of an adequate framework for the valuation and taxation of digital assets.
The Magna Cum Laude award recipient from the prestigious College of William and Mary identifies the intangible nature of digital assets as the main inherent challenge in valuing these assets. He stated that “Unlike physical assets such as physical currency, equipment and real estate, digital assets are inherently nonphysical and therefore can be moved across borders with little to no traceability. To remedy the issue of accurately valuing digital assets, a lot of collaboration is required from all parties” Adegbite went on to pinpoint that the taxation of these assets also pose a major threat to the integrity of the stock market. According to him, it is not only an issue of revenue generation for governments but also a matter of compliance and fairness. He added that as these transactions become more prevalent in today’s world, it is important that all taxpayers contribute their fair share to public finances. Adegbite stresses that the issue with taxation of these assets lies in their borderless nature. Without a robust taxation policy, there is a significant risk that individuals and businesses will exploit loopholes in tax laws to evade their obligations.
How then can these assets be appropriately valued and taxed? Adegbite whose career trajectory, academic achievements, and duration in the field evidence his expertise provides a number of remedies.
“Firstly, the industry must leverage technological solutions like accounting analytics, artificial intelligence and blockchain technology. These technologies have the ability to provide an ironclad record of transactions which are invaluable for the verification and authorization of ownership of digital assets. Secondly, intentional collaboration between the industry and regulators is imperative. Digital asset issuers, exchanges and regulators must come together to develop effective valuation standards and best practices, by working together, these stakeholders can combine expertise and insights to create an adequate valuation process that ensures compliance with regulatory requirements”.
Regarding the issue of taxation, Adegbite has this to say – “A suitable solution for the taxation of digital assets lies in a tax code that already exists in many countries today. The Capital Gains Tax can be modified to include digital assets while accounting for their unique characteristics. The sale and exchange of digital assets can be treated like capital gains and inspiration can be drawn from the tax treatment of stocks and securities which are currently the assets most closely related to digital assets”.
Finally, Adegbite concludes that addressing the taxation challenges associated with digital assets requires a combination of legislative reforms, technological solutions, international cooperation, and taxpayer education. He says, “by engaging experts who are capable of creating and implementing these remedies, governments can ensure that digital asset taxation policies are fair, effective, and conducive to the growth of the digital economy”.
