The Cryptocurrency Tax Fairness Act is a step in the right direction
The IRS treats Bitcoin as property, and this has worrisome effects on Bitcoin’s usefulness as a currency. Whenever you use Bitcoin to buy a pizza, your transaction is taxable; you must determine whether the Bitcoin you gave the pizzeria for your pie has gone up or down in value since you acquired it. If you paid $1 for the Bitcoin when you bought it, and you’re now using it to buy a pizza that costs $20, your purchase means that you’ve realized a $19 capital gain.
When all transfer of Bitcoin is considered a disposition of property, that creates a tremendous record-keeping burden, in addition to the tax exposure. This extra “cost” of using Bitcoin exerts a downward pressure on its adoption. Digital-currency proponents claim a wide range of benefits from the widespread adoption of those technologies. If we believe the proponents — or at least, if we want to see if they’re right about the benefits — we should avoid external pressure weighing against adoption. And because every new user of a given digital currency benefits the existing users (having new places to spend one’s Bitcoin, for example, makes the Bitcoin in your wallet more valuable), shackles on adoption have a multiplicative, negative effect, and are correspondingly more problematic.
In addition to the principled arguments against classifying digital currencies as property (which I will explain in a forthcoming article), the positive transformation promised by the digital-currency advocates could be significant. We should give Bitcoin and others like it a fighting chance.
Yesterday, U.S. Representatives Jared Polis (D-Colo.) and David Schweikert (R-Ariz.), the co-chairs of the Congressional Blockchain Caucus, introduced the Cryptocurrency Tax Fairness Act of 2017. The bill would create a tax exemption of up to $600 per transaction on capital gains from digital-currency transactions involving the trade of goods or services. The exemption would not apply when digital currencies are traded for other currencies (e.g., when one sells Bitcoin for U.S. Dollars on an exchange). But it does mean that when one uses Bitcoin to buy a pizza or a haircut, the capital gains realized are exempt from taxation.
The limitation of this exemption to transfers of digital currencies for goods or services is appropriate, if the goal is to lift external pressure on the adoption of digital currencies for use as currencies. Speculators trading on exchanges are still taxed (albeit more harshly than foreign-currency traders, who can select between taking unlimited capital losses against ordinary income, or classifying up to 60% of their short-term gains as long-term gains), and this should make the proposal more palatable to would-be opponents.
The Cryptocurrency Tax Fairness Act of 2017 is a step in the right direction. It would remove an unwarranted stumbling block to the widespread adoption and use of digital currency as currency.