An interesting debate has erupted among prominent figures in the cryptocurrency world over the taxation implications of using XRP for cross-currency payments. The discussion revolves around XRPL pathfinding and its potential effects on taxable events.
Alex DovbnyaFredo Ayala, an accounting and finance consultant passionate about digital assets, initiated the thought-provoking conversation. He asserted that if an XRP settlement occurs within a single ledger without price fluctuations, taxable implications would apply only to the customer. However, if price shifts occur during the pathfinding process, both increases and decreases in taxable events may arise.
#XRPL Pathfinding causes taxable events in the US.
— Fredo Ayala 🏴☠️ 🪝 (@Fayala_brash) July 29, 2023
If it settles in a single ledger and prices do not change between buying and selling then the implications are only for the customer.
If they shift while pathing then we got -/+
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Neil Hartner, a senior staff software engineer at Ripple, sought clarity on a specific scenario involving a USD to EUR cross-currency payment, autobridged via USD to XRP and XRP to EUR. Ayala confirmed that such a transaction would indeed trigger a taxable event, dependent on gains or losses compared to the cost basis at the time of purchase.
Matt Hamilton, a former director of developer relations at Ripple, interjected with an intriguing comparison to traditional banking processes. Ayala explained that banks, being legal entities, already report gains and losses, while the decentralized exchange in XRPL is not a reporting entity. Thus, the responsibility for handling tax-related matters falls upon the party initiating the transaction.
Yuri MolchanDavid Schwartz, Ripple's current CTO and one of the architects of XRPL, emphasized that the taxability of gains and profits remained independent of who reports them. He argued that any profit or gain generated during the process should be considered taxable income for the party responsible.
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