networking in tax profession
networking in tax profession

Blockchain Technology and What it Means for Tax Professionals

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The business world has been slow to warm up to virtual currency. Bitcoins are accepted by Overstock.com, but not by Amazon.com. Signs reading “Bitcoin accepted here” are scattered throughout Chicago, New York and San Francisco, but aren’t commonplace nationwide. In many eyes, Bitcoin has been tarnished by its elusive creator and ties to illicit markets. Yet, the enduring legacy of Bitcoin may not be the cryptocurrency itself, but rather, its underpinnings: blockchain technology.

How does blockchain technology affect a tax professional? We’ll explore that, but first, here’s a brief primer on what blockchain is and how it functions.

The simplest way to define blockchain is as a shared or distributed ledger. All participants in the system can see the same version of the ledger and can make entries in the ledger that are distributed to other participants. The ledger tracks ownership – and this can be ownership of monetary value (as in Bitcoin), or other items such a real estate or famous antiques. By taking account totals of the ledger, participants can see the current state of ownership at any time.

Updates to the ledger are distributed in blocks that are linked together in an unbreakable chain. Because each block is mathematically linked to prior blocks, it’s not possible for any participant to go back and erase or change prior transactions. In this way, transactions in the blockchain are indelible.

By tracking all transactions in a shared ledger, available for participants to see, blockchain removes the need for the involved parties to have their own private ledgers and invoices. For example, if X sells property to Y for $750, blockchain records the transfer of the money from Y to X, and the transfer of ownership of the property from X to Y. The change in ownership is tracked in the chain: X can’t sell the property twice; Y can’t claim the sale didn’t go through.

One of the most appealing aspects of blockchain technology is its immediacy. It takes minutes for the blockchain to definitively track changes of ownership, rather than the hours or days currently required. It’s also transparent and adaptable, and has the potential to change the way business is done in numerous industries, from banking to government and real estate. Using blockchain, a wide range of transactions can be “transparent and incorruptible” in a shared ledger – a “World Wide Ledger” – while personal information can remain private and secure. Since blocks in the chain are indelible, participants cannot tamper with prior transactions.

Blockchain represents a bold vision, and one that will take time to fully realize. Yet, bit by bit, it is being realized. At the end of 2015, Nasdaq revealed that it had successfully completed and recorded private securities transactions using blockchain technology. In fall 2016, one of India’s largest private banks successfully completed blockchain transactions, and numerous American banks are testing the technology. The use of blockchain technology to track government records is now legal in the state of Vermont (although its agencies are proceeding with caution), and Sweden is exploring the possibility of putting the country’s land registry system on a blockchain public ledger. Momentum is also building around blockchain-based smart contracts, which have the potential to revolutionize contract agreements with automated execution of contract terms at a fraction of current costs. Further possibilities for the technology are being explored every day.

For now, there are still significant obstacles to using blockchain in day-to-day business. All transactions are essentially public and could be used to mine data. Since blockchain is decentralized, there is no one source to turn to should problems arise. While it is still in the early stages of development, if blockchain technology is adopted as anticipated, it will change the way the world transacts business, just as the internet has done.

How Blockchain Could Affect Tax Professionals

Tax automation software has already accelerated the pace of tax determination, filing and remittance, and blockchain has the potential to further streamline the process. Should corporations record all expenses and revenue-generating transactions in a public blockchain, tax administrations would have virtual real-time access to the ledgers. The current delay between business transactions and tax remittance would be eliminated because tax could be automatically calculated and remitted as soon as a transaction is complete. It could also be automatically deducted by watchful government entities.

The impact on the compliance process could be huge. If tax is remitted with each transaction, periodic returns could be eliminated, or at least greatly altered. Audits could be less involved, but ongoing, reducing the opportunity for fraud. The cost of compliance could also be significantly reduced for businesses and government agencies.

Blockchain technology has the potential to revolutionize tax administration and data entry for tax professionals so that they can focus on advising clients. It merits close attention as it develops – and it is likely to develop rapidly. Keeping yourself well informed is essential. It will enable you to adapt your business to the new technology and advise your clients on how the technology could affect their business in the years to come.

Peter Horadan
Peter Horadan

Written by Peter Horadan

Peter Horadan is executive vice president of engineering and chief technology officer, leading software development and operations at Avalara. His extensive background includes leadership positions in engineering, operations and client services. In addition to building and operating SaaS services, Peter has a long history of creating industry-leading commercial software products. Before joining Avalara, he served as a technology executive for several private and publicly traded companies, including, most recently, Scout Analytics. In addition, he has directed research and development at Concur Technologies, and has held leadership roles at Microsoft, Corillian and BEA Systems. More from Peter Horadan

One response to “Blockchain Technology and What it Means for Tax Professionals”

  1. Similar extensive tax/business data transparency requirements have already been mandated by a number of large countries, for example Brazil and China. Over the next year or two we will see other countries starting to require business taxpayers to do the same: Poland already implemented this for large taxpayers mid-2016 and other European countries will follow soon. This is based on the so-called Standard Audit File for Tax (“SAF-T”) template proposed by the OECD.

    Now is the time to develop a sensible global indirect tax strategy – and get ready for full tax data transparency!