How the IRS Could Leverage Hedera for Taxation

Inara coined the phrase, “When the page turns, the author earns.”  This slogan has a certain cadence to it.  It’s easy to remember because it rhymes, and it’s easy to understand because of its brevity.  This startup developed a platform built on Hedera Hashgraph and allows authors to receive micropayments for the pages they write.

This partnership with Hedera was an early initiative/Proof of Concept (PoC) for leveraging this new kind of distributed ledger technology (DLT).  At that time, it seemed quite revolutionary to suggest an author could be compensated for every page that was read instead of every book that was purchased.  It seemed like a pipe dream to think they would also get paid in real time!  And yet, this is a present-day reality.

The same idea could be applied to others within the creator economy.  There should be a solution for musicians, too.  “When the music is played, the artist gets paid.”  That works, right?  Oh, wait! is a marketplace built on Hedera where music NFTs can be minted by anyone.  And, yes, that is their slogan.

From individuals to institutions

Here is a thought experiment: If the IRS were an individual searching for a way to receive micropayments in real time, what would that look like?  How would that happen?  Is it even possible?  It may seem silly to imagine it this way.  But in light of the IRS’s annual collections, couldn’t the various taxes collected be viewed as micropayments (at least them)?

Okay, this seems to be a reach at best and completely intellectually dishonest at worst.  It’s really not fair to categorize any tax payment as a micropayment especially to those who are paying them.  Maybe for money-collecting institutions like the IRS, it should be viewed from the other side.  Every tax assessment, large or small, is a micro-portion of their annual collections.  If a person pays quarterly taxes based on earnings, those assessments are even smaller.  And given size of their annual collections, these individual tax assessments could be considered a micro assessment.  

So, if musicians and authors and artists can receive micropayments for their work in real time, could this solution ultimately scale so that the IRS could receive tax payments for every micro-assessment?  If so, the IRS could have a cool, catchy phrase like these startups.  What about these?  Which resonates best?  Let #CryptoTwitter know, or tweet an original.

  • “When profits are made, your taxes get paid.”
  • “When crypto is mined, the staker is fined.
  • “When a node validates, the IRS confiscates.”

Even though these slogans leave something to be desired, they all cut straight to the chase.  There is no ambiguity.  The communications and public relations team at the IRS will have fun with this one.

In all seriousness, for taxpayers the U.S. Tax Code is an absolute albatross.  They have the paper trail to prove it!  The organizational structure to collect taxes is complex and complicated, and calculating the correct amount owed is not always clear.  Additionally, the risk of “doing it wrong” only makes it worse.  The IRS is a daunting organization with the power to make life a living hell.  In a recent article from Blockworks (Feb 3, 2022), the need for clear and simple crypto tax assessments is very apparent.  To settle a lawsuit, the IRS reversed course after taxing a couple on their node’s proof-of-stake rewards that remained unsold.

It does not need to be this complicated.  The technology exists today for governments large and small to eliminate much of the bureaucracy standing between tax policy and collections.  Whether they have an inclination to use it is another story all together.  But at least for digital assets, collecting capital gains on crypto could be simple, easy to understand, and paid in real time.

How would this work?

The IRS mints their own token — a genuine, bonafide, government-issued IRS taxation token — using Hedera’s Token Service (HTS).  This cryptocurrency would be used to pay taxes once the capital gains on digital assets is realized.  While minting, the IRS writes the code that determines the taxes owed using Hedera’s Smart Contact Service.  Taxes are assessed based on the current tax code and could be changed year-to-year (as the tax law changes).  Conversely, losses could be calculated when qualifying deductions are filed.  Massive and immediate losses (like those seen in rug pulls) could also help identify potential bad actors and scams in real time.

At some point, the IRS requires exchanges and nodes to implement the use of their token to record profits only after someone converts their earnings to fiat, a USD-based stable coin, or the inevitable digital dollar.  Once that happens, the correctly-calculated tax is withheld in USD, and that dollar amount is assigned to the IRS token.

For example, someone makes a $10,000 profit on their ABC/XYZ token, and the capital gains tax is set at 15%.  $1,500 would be (1) withheld from the proceeds of that transaction, (2) assigned to the IRS token, and (3) immediately sent to the IRS’s wallet.  Similar to how exchanges already charge a trading fee in real time, this would be an added step to calculate, collect, and distribute the correct amount in taxes.

Maybe the IRS does not even need to use Hedera’s token service.  Maybe it can be calculated like trading fees?  Either way, all of this assumes a few things for this to come to fruition.  New policies and procedures are in place for the crypto space.  Node operators and exchanges have been given tools and the opportunity to integrate and comply.  Only regulated platforms would be allowed to operate within the U.S. (or for U.S. taxpayers living abroad).

Pieces coming into place

Before dismissing this notion as wishful thinking or a “never-gonna-happen” scenario, consider the recent news and developments involving the IRS and Hedera’s governing council members.

On November 16, 2021, Hedera welcomed ServiceNow to their governing council.  From Hedera’s website, ServiceNow “offers IT, Employee, Customer, and Creator workflows to help drive every aspect of a business’s digital transformation.”  Their existing customer base and partnerships already touch 80% of the Fortune 500 (, and they boast of being able to build products and offer solutions “faster than ever from ideas to customer-ready in days” (ibid.).

Six weeks later, ServiceNow landed a massive, 5-year contract from the IRS to consolidate legacy systems into one platform of record.  On January 4, 2022, The Consulting Report published an article explaining the purpose and scope of this initiative.  Essentially, ServiceNow will be helping the IRS do its job more efficiently through better workflows and a new, stream-lined platform.  The IRS will finally step into the twenty-century.  Put these developments together, along with what has already been proven, and this kind of automated taxpaying platform seems more likely than not.

From an organizational structure standpoint, many things would need to change.  Existing systems would need to be revamped, new tools would need to be developed (not to mention new processes and procedures).  But from a Layer 1 developer standpoint, what other applications/steps are missing here?  Is there a different service Hedera needs to offer in addition to HCS and HTS?  Please contribute to the conversation or if have a better idea.  This would be a fascinating monumental development in the evolution of both crypto and tax collection.

Barry D. Cram


Written by Hbar News


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