Apr 18, 2022 8:00 AM

Crypto Is Poised to Reshape Taxes—and Cities

Tokens like CityCoins could turn taxes into another investment vehicle, for better or worse.

Collage of images of Miami infrastructure Boston tea party tax forms and crypto coin

Taxes, CityCoins founder Patrick Stanley says, can stop being a mind-numbing civic ritual and become an exercise in freedom—if we tokenize and calibrate them the right way. Stanley’s crypto-based invention is what he calls “an opt-in tax of opportunity, as opposed to obligation,” wherein boosters tithe a particular city with crypto because they have faith in the municipality and its mission. “They want to see the city working as a capital allocator, and they want to bet on the success of the city,” Stanley said in a podcast interview. Essentially, they can cheer a city government on through computational processing worth millions, if not billions, of dollars—the equivalent of a gilded “like” button.

CityCoins launched its first project with the city of Miami in August 2021, raking in $2.5 million in “pseudo-tax” income in its first 20 days. New York City and Austin now have their own coins. Within the CityCoins matrix, miners receive a city-specific coin, like MiamiCoin or NYCCoin, by trading in STX, the token for Stacks, a protocol that operates on top of the Bitcoin network. (Stacks is also Stanley’s former employer.) In addition to new CityCoins tokens given to miners, STX holders who participate in Stacks’ consensus process receive 70 percent of the STX spent to mine the CityCoins, while municipal governments receive 30 percent. Cities that aren’t allowed to hold crypto can immediately convert their STX gains into dollars. It’s in some ways free money for cities: a windfall for governments that, in the US at least, seem perennially cash-strapped and driven to austerity. In a victory-lap interview with Miami’s pro-crypto mayor, Francis Suarez, Stanley framed CityCoins as both disruptive and deeply familiar. Cities receive 30 percent of miners’ STX—no more, no less—because it’s the tax rate people in the US are used to.

It’s not like the current US federal tax system is beloved. Hollowed out by Intuit’s 20-year efforts to profit off Tax Day, the system US taxpayers wrangle is equal parts esoteric and expensive. Things get even murkier for the millions who hold crypto; federal crypto taxation is governed by a chimera of revenue rulings and FAQs. “They don't really have any good regulations out there yet,” says Emery Sheer, a Florida-based accountant who runs a YouTube channel on crypto taxation. Sheer says many of the FAQs the IRS uses to clarify crypto taxation fail to mention crypto at all, instead covering congruent asset classes that are also defined as property. “We have to kind of guess,” he says.

While Congress and the White House mull the future of crypto and creep toward clarity—is it an investment vehicle, digital asset, currency, glitzy kind of Kohl’s Cash, or some combination?—city-level developments like CityCoins may beat federal lawmakers to the punch, reshaping municipal taxes in crypto’s image, and, in the process, forcing national policy to follow its lead.

If Suarez and Stanley have their way, CityCoins’ launch, bolstered by the uncertainty of crypto taxes, will signify a sea change for taxes. For one, taxes may assume an entirely new form, following in the footsteps of crypto, which claimed to improve upon its fiat predecessor while becoming another investment vehicle. But unlike fiat or other forms of crypto wealth, which require lobbyists or other workaround measures in order to shape policy, CityCoins and its ilk aim to control a city’s spigot, making its political power immediate. The “we” of the city may change in the process, no longer defined by geographic borders or bodily location, but by token community and portfolio distribution.

Antiquity offers a distributed ledger of its own, suggests Erica Robles-Anderson, a scholar of digital taxation. City-states and empires handled the recto and verso of physical coins as political arenas—the state held sovereign control over the front of the coin, but local mints would laminate their own symbols on the back. Micro- or regional-level faiths, commitments, and beliefs emerged based on who would accept certain tender.

Early Christians included the Ancient Roman ideas of money and exchange in their sermons, depicting God as a providential manager and Christ as salvific currency, according to Devin Singh, who studies religion and economies. From the tradition of jubilee—the wiping of debts and emancipation of enslaved people—in Leviticus to mutual-aid models in the Book of Acts, Abrahamic texts often staked economic claims; these images endure in public memory and political movements.

The US, where the theopolitical power of money is central to the nation’s founding myth, is no exception. “The US … is predicated on people's ability to have a revolution around taxation,” says Robles-Anderson. Across US history, from the Boston Tea Party to the Tea Party, the taxpayer has questioned the obligations of the state according to those who pay in. “It’s not a question of technical capacity, it’s a question of political will,” she says. “And taxes occasion that question.”

Modern-day crypto movements keep this tradition alive, Singh explains, including among self-identified “secular libertarians” who add moral significance to new methods of moving money. Much like the past movements Singh describes, crypto communities today have struggled with the simultaneous need to set new precedents and establish the superiority of their system while channeling incumbent power to convert more adopters. Born the same year as the 2008 recession, blockchain-based technologies positioned themselves as a means to avoid future centralized crashes, bypassing extant financial mechanisms—and their oversight—by moving data from one place to another in new ways.

But underneath largely heterodox and libertarian rhetoric lies an acutely statist endeavor. “Crypto is deeply entangled with state objectives and priorities on multiple levels,” says Zane Griffin Talley Cooper, who studies crypto infrastructure. Beyond the municipal efforts of CityCoins, the crypto industry is successfully writing its own laws on the state level in the US, with at least one state bill including entire sentences provided by a pro-crypto lobbyist. Crypto systems require negotiating with real estate companies, state energy utilities, and regulators to stay alive. And the influx of cash and venture capital accompanying its projects means crypto can align with the goals of governments, like Miami or Wyoming or El Salvador, in exchange for subsidies or tax breaks and favorable financial regulation.

The movement taps into the revolutionary financial rhetoric of US history while employing pay-to-play statecraft and the promise of wealth to ensure long-term political survival. If it scales successfully, crypto can spread even more of its influence to the federal level.

Like any other cryptocurrency, CityCoins tokens are subject to regular US taxes, which can make the real tax rate for the currency nearly double the 30 percent tribute. And the secondary market for MiamiCoin has been volatile since its launch. Cash flows from MiamiCoin have also decelerated, with the city receiving only an additional $2.75 million in the seven months following its initial surge. But these shortcomings haven’t halted CityCoins’ efforts to expand the current boundaries of taxation and representation. And regardless of whether this particular coin succeeds, its tentative acceptance by large cities signals a coming change in the way we approach taxes, for better or worse.

Just as cryptocurrency’s initial promise to digitize currency has given way, at least for now, to its primary function as an investment, opt-in tax tokens like CityCoins turn taxes into an investment vehicle. Handing over opt-in taxes to a city can help balloon the coin’s secondary market, and if the practice continues and surges in popularity, the 70 percent of these tithes held by individuals could grow in value over time. (The project also boosts demand for Stacks, the protocol on which CityCoins operate, which can enrich those who hold equity in the company.) The act of paying taxes thus becomes an explicitly money-making enterprise.

This has the potential to upend our notion of what a city is and whom it represents. By and large, the “we” of our cities is defined by the people who live and work there. Though cities are already beholden to commercial pressures by real estate developers and others, CityCoins raises the possibility that a city's constituency might no longer have to do with residence or geography, but instead be a collection of its shareholders. This throws the American performance of equality out the window, proudly institutionalizing what’s always been true: Property, not personhood, confers political power.

How will these coins flex their influence? CityCoins can provide sudden inflows of cash or instantaneous capital flight—functioning as both a carrot and a stick. With the option to mine STX into an array of city-specific coins, miners have the freedom to dedicate their resources to another city if they disapprove of political developments within a particular municipality. The taxes residents already pay can, in theory, drive a city’s leadership to make certain changes on behalf of taxpayers, as can elections and migration. But due to voter suppression; growing wealth inequality; and exclusionary, violent immigration policies, these three civic pressures are far from universally held. CityCoins wants to tokenize those failures, pushing something like San Francisco’s perceived “tech exodus” into hyperspeed.

CityCoins holders are by no means a monolith, but pro-crypto policies, including lower or no traditional taxes, are more likely to elicit approval in the form of more STX, because lower taxes are favorable for parking wealth, and such conditions may make municipal governments more reliant on opt-in taxes. This can have profound effects on where wealth—not the wealthy—settles. “This is reconfiguring the geography of tax-havening internal to the border by virtue of creating another circulation system from within,” says Robles-Anderson. Domesticating tax havens would be contingent in no small part upon federal responses to crypto’s encroachment. But the Caymanification of our cities can have an aggregate effect, in which shareholders can be from anywhere yet shape a location insofar as their tokens confer political power. This may encourage city governments to listen primarily to holders of CityCoins—not city residents. Considering the average US crypto holder is white and male, the movement’s larger social platform beyond taxes can have serious consequences for the most marginalized.

Today, crypto’s political efforts require playing by the holders’ rules through lobbyists, electoral contributions, and promises of windfalls for local economies. But the injection of tokens like CityCoins into political systems can confer regulatory power on tokens in and of themselves. Much as the ruling class conflates the stock market’s health with that of the economy and commands accordingly, minute fluctuations in token value and volume may stand in for public opinion and thereby sway even the most granular governmental decisions.

Beyond CityCoins’ undetermined future, it remains to be seen whether crypto writ large will usher in a technocratic nirvana, wither the way of Dutch tulips, collapse like an audited Ponzi scheme, or lead to unforeseen outcomes. Regardless, the capitalist urge to turn a civic tradition into a financial instrument will survive whether CityCoins fizzles out or not. TurboTax has already done this for its shareholders; CityCoins or some future avatar will lead the charge in “democratizing” those gains for others. But the civic tradition of birthing political movements by confronting unjust financial tools remains alive and well, too. Whatever comes next, we can all agree the IRS leaves ample room for improvement.