Facebook’s Libra cryptocurrency will “benefit” tax authorities at the household level and consumption level, according to Libra’s policy and communication chief Dante Disparte. This means that a sales tax will be applicable to purchases made using the Libra token. But investors may escape the IRS’ dragnet by avoiding capital gains tax, according to Christian Catalini, head economist at Libra. This is primarily because Libra is designed as a low-volatility cryptocurrency with minor price fluctuations, making gains from its price changes negligible.
Disparte and Catalini made the statement in an interview providing more details regarding Libra to online publication Techcrunch.
The social media giant announced the venture a month ago. David Marcus, who heads the initiative at Facebook, is set to appear before Congress tomorrow to answer questions from lawmakers.
The Techcrunch interview reveals two things about Facebook’s plans for Libra.
First, partnerships with local players is critical to Libra’s success. This point is related to the portability of Libra with local currencies: it is important that Libra can be exchanged with local currencies.
Kevin Weil, VP of product at Calibra – Facebook’s wallet on the platform, told TC that Libra’s open ecosystem is expected to encourage development of on-the-ground services like localbitcoins.com, a service that enables peer-to-peer exchange and trading of bitcoins. While it is based in Finland, Local Bitcoins operates in more than 249 countries. “…ultimately being able to move between Libra and your local currency is critical to driving adoption and utility in the early days,” said Weil.
Second, Libra will work with regulators and tax authorities to ensure compliance and tax payments. The platform’s open ecosystem offloads the responsibility for maintaining AML/KYC compliance to developers of local jurisdictions. Calibra, Libra’s custodial wallet, will adhere to the AML/KYC regulations in the markets that it operates. (But that does not mean that it will be welcomed everywhere.)
But Questions Remain
For the most part, Facebook has window-dressed the initiative as a charitable mission to bring financial services to the world’s unbanked population. But there is more to that than meets the eye.
Jerry Brito, executive director at Coin Center, outlined his key concerns in tweets. For example, the responses do not provide clarity on the role of Libra Association as an administrator of the cryptocurrency. There is also the question of capital gains tax for purchases made using Libra’s cryptocurrency. Catalini told TechCrunch that all transactions made using the Libra cryptocurrency will be tracked and the losses or gains reported on Tax Day. In effect, the value of the coin will fluctuate even as its users makes purchases with it. Along with network speeds, this has been a significant bottleneck in bitcoin’s mainstream adoption as well. Brito says a capital gains tax will be applicable to the transactions.
There is also the bigger question of Facebook’s role in the entire venture. The Libra Association’s setup and promised incentives to investors have led some commentators to compare it to an exchange-traded fund that provides a regular stream of cash to investors. A WSJ editorial opined that Libra allows Facebook to print money (and make tidy profits in the process).
Libra’s Disparte told Techcrunch that partnerships (with NGOs) are critical “to encourage the monetization of identity processes both through working with government issuing credentials for more people and, also, making use of new types of information for identity and authentication.” The key words here are the “new types of information” for identity that Facebook has in mind. The social network has previously attempted to foist its social network onto millions in India through a cheap phone. But that attempt was scuttled due to privacy concerns.