Recent tax regulations targeting research and development (R&D) in the United States could potentially result in an exodus of crypto companies from the country. The regulations, which mandate the amortization of software development costs over 5 or 15 years, depending on whether the work was done domestically or internationally, are expected to have far-reaching consequences for innovation in the country. In simple terms, this new regulation means that tech companies could lose over $1 million but still have to pay a significant amount of taxes.
Impact of the new tax regulations
The new R&D tax law, which seems harmless on the surface, may actually hurt innovation and job creation in the U.S. Many countries offer more attractive R&D tax credits, which could incentivize U.S.-based software development to shift to countries like the United Kingdom, where the rules are simpler and more lucrative. This would leave the U.S. entities focusing mainly on marketing and sales.
It’s also likely to negatively impact the cash flow of startups, which is crucial for the country’s entrepreneurial economy. The rules may lead to situations where a company experiences a substantial loss in operations but still owes a significant amount in taxes. This could stifle innovation in cutting-edge technologies like artificial intelligence and blockchain, especially in the current climate of high interest rates and increased regulation.
Big tech layoffs and implications on crypto companies
The new tax regulations may already be contributing to layoffs in the tech sector. For blockchain, crypto, and NFT companies, which already face scrutiny from the Securities and Exchange Commission, it might make sense to distance themselves from the U.S. market.
Several crypto and blockchain companies have already made the decision to move their operations out of the United States due to the unfavorable regulatory environment. Notable examples include ShapeShift, a digital asset exchange, which chose to move its headquarters to Switzerland, and Binance, one of the largest cryptocurrency exchanges, which opted for Malta as its new home. Additionally, Circle, a digital asset company, migrated its exchange operations to Bermuda to escape the restrictive US regulations. These cases illustrate a growing trend of crypto and blockchain companies seeking friendlier jurisdictions for their businesses, which may be exacerbated by the new R&D tax regulations.
There are numerous unanswered questions and complexities surrounding the implementation of this new tax law. One significant risk associated with the law is the potential tax liabilities faced by companies that experience a big loss and have no current income. In addition, the rules may have unintended consequences for equity investors, who could lose funds in the event of a company’s failure.
While there were efforts to repeal the tax law, they failed due to political disagreements over the Child Tax Credit. A new repeal proposal has been introduced, but it has not gained much traction. In light of current challenges faced by blockchain companies, including increased interest rates, the crypto winter, and the Silicon Valley Bank failure, there is a growing concern that many tech companies may suffer unless Congress takes urgent action.
