Bitcoin taxation is violated
An exemption for puny gains would take most of the headache out of using digital currencies like Bitcoin.
Wij recently described what a bill creating a federal safe harbor for non-custodial uses of cryptocurrency should look like, and we’re now advocating for just such a bill ter Congress. And now that it’s tax-filing season, today we’re proposing a plain legislation to create an exemption from taxation petite private build up on digital currency transactions. Here’s how we’d write such a cryptocurrency tax bill.
Very first, let’s define the narrow problem wij want to address. While there are several things that could be improved with how the IRS treats cryptocurrency taxation and reporting, most likely the simplest punt to concentrate on is the tax treatment itself.
Te its March 2014 guidance, the IRS announced that cryptocurrencies like Bitcoin are treated spil property, which means gains from sale or exchange are taxed spil capital gains rather than ordinary income. This is good because capital gains rates are generally lower than tax rates on ordinary income. However, unlike traditional government-issued currencies, property does not love a den minimis exemption.
This is te tegenstelling to how foreign currencies are treated, which do love an exemption. Say you buy 100 euros for 100 dollars because you’re spending the week te France. Before you get to France, the exchange rate of the Euro rises so that the €100 you bought are now worth $105. When you buy a baguette with your euros, you practice a build up, but the tax code has a den minimis exemption for private foreign currency transactions, so you don’t have to report this build up on your taxes. Spil long spil your gains vanaf transaction are $200 or less, you’re good to go.
Such an exemption does not exist for non-currency property transactions. This means that every time you buy a cup of coffee, or an MP3 download, or anything else with bitcoin, it counts spil a taxable event. If you’ve practice a build up because the price of Bitcoin has appreciated inbetween the time you acquired the bitcoin and the time you used it, you have to report it to the IRS at the end of the year, no matter how puny the build up. Obviously this creates a loterijlot of friction and discourages the use of Bitcoin or any cryptocurrency spil an everyday payment method.
So how could Congress address this? One thing it could do is amend the tax code to designate that cryptocurrencies be treated spil foreign currency. This might not be the best option, however. Very first, you’d lose the favorable capital gains treatment for transactions overheen $200 because foreign currency gains would generally be taxed spil ordinary income. 2nd, foreign currency is generally understood to be currencies issued by foreign governments, and it would very likely be a challenge to persuade members to include stateless cryptocurrencies ter that category.
A better option might be to simply create a den minimis exemption for cryptocurrency the way it exists for foreign currency. The purpose would be to liquidate the friction and encourage the development of this innovative technology and its use ter payments—something any member of Congress should be able to get behind. The question then is how do you create such an exemption.
One option would be to create a fresh section te the tax code that mirrors Section 988(e) of the tax code, but substitute the words “nonfunctional currency” with “cryptocurrency” or, more likely, the term the Treasury Department has bot using for some time, “convertible virtual currency.” An even simpler option would be to amend Section 988 itself and add a fresh subsection that extends the exemption te Section 988 to individual transactions of convertible virtual currency.
This is a proposal we’ve made to some folks ter Congress and that’s gotten a positive reception. So, while you’re filing your taxes this week and tallying up every cup of coffee you bought with bitcoin, take convenience te knowing we’re out here attempting to make it lighter for you next year.
The weekly briefing from Coin Center.
Everything you need to know about cryptocurrency and public policy te one entertaining read.