Taxing Cryptocurrencies

I’m writing to outline some thoughts on taxation of cryptocurrencies like bitcoin and digital assets as whole. While this is a hot topic, it is unfortunately misunderstood by many, and our nation’s policy framework has yet adjust to the new world that is unfolding. As anyone who watches mainstream news can tell you, the price volatility of Bitcoin, and other competing currencies, has been staggering. With that volatility has come a tremendous transfer of wealth, and of course this has implications that include taxation. As with any completely novel activity, asset, or product, it starts off being managed by an existing framework of policy guidance that was designed for wholly different class of definitions. For the purposes of this letter I will limit the scope to that of capital gains as it pertains to cryptocurrencies.

While the headlines have tracked the price of Bitcoin specifically, there are now over a thousand cryptocurrencies that are traded on dozens of exchanges all over the world. Each of these digital assets (tokens, coins, currencies), are separate, and distinguishable by qualities that sometimes stem from notable differences in technology, project missions, and organizational backing. Exchanges allow individuals and institutions to acquire these digital objects usually by the trade of other high value cryptocurrencies like Bitcoin, and Ethereum. Often times, for most of these thousands of crypto assets, the only way to tabulate a loss or a gain is to track the exact dollar price of the precise amount of Bitcoin for which the other currency was worth at the moment of trade. This is a bit like if I traded one collectable baseball card for another, with dollars never coming into the exchange. You can imagine that if you traded these cards many times over an extended period of time, the capital gains or losses could be rather difficult to tabulate with precision. At best it would take meticulous record keeping.

If this was just a question of tabulating the gains/losses of crypto traders and investors this would be a simpler discussion. Most of these digital assets are not designed to be securities like stocks and bonds. They are designed to be a means of exchange. Under current tax law, not only are individuals responsible for recording the value of assets traded on exchanges, they also would expect each purchase, however small or large, to be a potentially taxable event. Imagine if every time you bought a coffee, you would have to track and record the exchange rate at the time you made your purchase. This is clearly an onerous process. For this last tax season, I did just that. Luckily I only made a handful of direct purchases with Bitcoin (the most highly price tracked crypto) , but over time, I expect I may have dozens if not hundreds of purchases with different cryptocurrencies, sent from a variety of digital wallets and accounts. It may become incredibly difficult to accurately report tax gains and losses.

I’m not opposed to capital gains tax generally, as it is a good method of closing tax loopholes for revenue generating activity not covered by traditional income taxes. As it pertains to cryptocurrencies, capital gains may not be an appropriate tax mechanism. I will support this argument with 3 points.

1. The large influx of capital into this space will not be unabated indefinitely, and the value of these assets will stabilize overtime, negating the need or reward in taxing these transactions.
2. The economic benefit of cryptocurrencies are the efficiencies of not requiring centralized management. Requiring extensive centralized services to track taxable activity negates the benefit of the technology.
3. It is unreasonable for individuals to be required to treat every retail purchase as a taxable event. Capital gains are a better mechanism for tracking the trade of securities or land sales, rather than assets that are meant to be used as a currency.

I am proposing a policy compromise to only require the tracking of gains on trades of cryptocurrencies that involve direct exchange of USD or foreign fiat currency. While this would reduce the qualifying activity, it would capture a large amount of speculation, while reducing its effect on cryptocurrency that is being used as a currency. I believe that reducing the complexity of tax reporting will make it more likely for people to report in the first place, and may actually facilitate more compliance. In the end I hope that future policy can serve to bring more certainty as well as fairness into the crypto space, as this technology has the capacity to transform commerce and the global economy.