Crypto Recordkeeping in the Absence of De Minimis
Cryptocurrency users have one common gripe: managing transaction records is burdensome and, taxes are to blame.
The recent Bitcoin bull-run has brought an exuberance not felt since 2017. Increased volatility leads to a greater potential for profit. It may be difficult to curb emotions during such rapid price appreciation, but now is a good time to remember how 2017’s FOMO led to 2018’s tax bill. Taxes may be a “cost of doing business” for traders, but they are an unnecessary burden for those transacting small values.
It is not unreasonable to expect to pay taxes when disposing of an asset that has increased in value. The tax rules seem logical, but most people don’t think about capital gains taxes because of the many common exceptions to this rule. Tax deferrals when selling a house are used to encourage continued home ownership, and tax breaks on retirement accounts encourage savings. Similarly, foreign currency exemptions mean international travelers never think twice about records when transacting between currencies, in stark contrast to cryptocurrency users.
Few consider why, but there is a specific reason why you didn’t think about taxes the last time you slipped your debit card into foreign ATM. In 1996, showing a rare concern for the bureaucratic burden in recordkeeping placed on the American jetsetting public, the U.S. Congress approved a de minimis provision that exempts travellers from tracking and recognizing gains on transactions in foreign currency so long that the transaction is personal in nature and that the gain is under $200 in value. Other jurisdictions have similar rules; in the United Kingdom, for example, the limit is £500. Unfortunately, for those wanting to trade in crypto, this term does not apply to cryptocurrencies. The Internal Revenue Service (IRS), the U.S. government body charged with collecting tax revenue, regulates cryptocurrencies, or digital currencies, as property. This means purchasing a coffee at your local crypto-friendly coffee shop or trading for a token that you think will moon will require you to keep detailed records and report any gains on your annual or quarterly tax return.
Before the emergence of the crypto tax preparation services, investors and speculators had to track every trade and transaction manually. If this doesn’t sound like a big deal, imagine making thousands of trades in a year and before tax day trying to remember the exact price of each buy and sell. Most exchanges now allow users to export trade logs that include the cost basis of each purchase, but if you make a purchase or move the coins to another exchange, then you only have half the data you need. Crypto tax preparation services attempt to link this exchange history with data from your wallet address to stitch together a full transaction history.
This sounds great in theory, but they only work properly if you can upload every exchange and wallet ever used. Any missing data would render the service useless. Given the frequency that crypto exchanges fail, this is not an unlikely occurrence.
So what can you do about it? No need to write to a local representative. In 2018, U.S. House of Representatives bill H.R. 7356, The Token Taxonomy Act, proposed a limited exclusion for gains under $600, recognized upon sale, exchange or transfer of digital currencies. This bill failed to gain broad support and was never enacted. Both the American Bar Association (ABA)
and the American Institute of Certified Public Accountants (AICPA) have written statements supporting inclusion of a de minimis exemption for cryptocurrencies, based on either the value of the gain or the duration held. But beyond their professional authority, these organizations must wait for further regulatory guidance.
There is no doubt the absence of a de minimis exemption for crypto is stifling use and innovation. Currently, the best practice is to be regimented about documenting date, amount and exchange rate of each cryptocurrency transaction. For the vast majority of crypto enthusiasts and hobbyists, this is about as practical as recording transaction data after placing an order in line at McDonald’s. An extreme option is to begin mining, as the costs can be offset against gains and there will be a tax lot to spend at the highest price. Hopefully, Facebook and Libra’s consortium of 28 companies and NGOs will put their combined lobbying efforts to work for the benefit of crypto.
Matthew Nemer is the Co-Founder of Linus — The Alternative to Low-Yield Savings Accounts
