Ripple CTO Reacts as Consultant Says XRP Ledger Pathfinding Causes Taxable Events in US

Ripple CTO reacts as accounting consultant Fredo Ayala discusses tax implications of XRPL Pathfinding on US crypto transactions.

In a recent crypto Twitter exchange, Fredo Ayala, an accounting consultant with an MBA, raised an intriguing point about the implications of XRP Ledger (XRPL) Pathfinding on taxable events in the United States.

According to Ayala, if the pathfinding results in settling a transaction within a single ledger and the prices remain unchanged between buying and selling, the tax implications primarily fall on the customer.

#XRPL Pathfinding causes taxable events in the US.

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 -/+

Europe sees crypto was gambling so this…

— Fredo Ayala 🏴‍☠️ 🪝 (@Fayala_brash) July 29, 2023

For context, XRPL pathfinding implies finding the best way to send XRP or other assets between two accounts on the XRPL.

Ayala argued that if prices shift during the pathing process, the situation becomes more complex, and the implications seem different in Europe. The accounting consultant suggested that USD-denominated payments or stablecoin-based transactions on the ledger be preferable.

However, he doubts whether US GAAP or the tax code could adapt soon to accommodate these novel methods. Ayala noted that an accountant crypto CEO had affirmed his assertion.

Ripple Developers React

Meanwhile, Neil Hartner, a senior developer working on Ripple’s On-Demand Liquidity (ODL), asked about a case involving a USD to EUR cross-currency payment. Ayala stated that such transactions would create a taxable event when auto-bridged using USD to XRP and then XRP to EUR.

According to him, the taxable event, in this case, would arise from the sale of XRP for EUR. The net impact of this event would be determined by whether it resulted in a gain or a loss compared to the initial cost basis at the moment of purchase.

On the other hand, Matt Hamilton, a former Ripple developer, sought clarification about non-blockchain payments. He cited a case where GBP is sent to BBD, but a correspondent bank converts it to USD.

Ayala noted that the correspondent bank must report gains and losses due to its legal entity, unlike decentralized exchanges. However, the responsibility of the payment entity making the transfer would only involve considering the relative difference in exchange rates between GBP/BBD at the time of payment versus settlement.

Ripple CTO Weighs In

In response to the discussions, David Schwartz, the CTO of Ripple, noted that the obligation to report does not affect the taxable nature of a transaction or the responsibility for paying taxes. 

“Who has to report something has no effect on whether or not it’s taxable and who is responsible for paying the tax,” remarked.

As I understand it, who has to report something has no effect on whether or not it’s taxable and who is responsible for paying the tax. A profit or gain is taxable income for the party who makes the profit or gain.

— David “JoelKatz” Schwartz (@JoelKatz) July 30, 2023

Schwartz reiterated that profits and gains are taxable income for the party that accrues them.