US lawmakers propose bill to cut cryptocurrency taxes
US Representatives Polis (D) and Schweikert (R), have proposed the Cryptocurrency Fairness Act – a proposition to cut taxes for cryptocurrency transactions under $600. This effort is the result of the work done by the Blockchain Caucus (BC), a bipartisan congressional coalition to embrace the ubiquity and utility of blockchain technologies. According to the official website, the caucus intends to “…[have] a hands-off regulatory approach, believing that this technology will best evolve the same way the Internet did; on its own”. The possibility of using Bitcoin (BTC) and other virtual currencies as ubiquitous methods of payment has motivated the BC. Despite having a market cap of $16.5 trillion, however, there are few commercial vendors in the US that accept BTC as a method of payment. A major reason for this is the current tax structure that applies to all virtual currencies.
To appreciate the legislation, one must look at the current tax code for cryptocurrencies to see where we are currently.
The current tax code for cryptocurrencies
The Internal Revenue Services (IRS) classified all forms of cryptocurrencies as property in 2014. The implied demand is to change the cryptocurrency tax structure to mimic that of financial instruments like stocks and options. The IRS specifies the exact rules by which BTC and all other cryptocurrencies must abide by. These codes specify the following at minimum:
- Employees paid in cryptocurrencies will pay taxes on their received payments. Their employer must report these payments on the W-2. And needless to say, these payments are subject to federal income and payroll taxes.
- Gains or losses from sale or exchange of cryptocurrencies depends on if the taxpayer holds the cryptocurrencies, or holds its realized value in cash. Taxes apply whenever the user realizes their assets to cash.
- Payments made through cryptocurrencies are the same as payments made in property.
Perhaps the most damning portion of the IRS’s stance on cryptos, is the third point. The IRS claims the right to tax cryptos like they were property. In comparison, the IRS requires the simpler 988 Form to report foreign exchange taxes. Gains and losses are taxed and deducted at a fixed rate. Some argue that the reason for this tax structure is to prevent retirees from evading capital gains taxes on their investments. When Forbes, makes this argument, they mean Roth IRA or Roth 401(k) accounts.
An unfortunate consequence of this is that all BTC transactions, whether its a $0.01 donation to charity, or a yacht, is taxed like property exchange, and not currency. This adds inertia to the mass-adoption of BTC as a valid method of payment. But with bipartisan support, there could be significant changes to that very soon.
The Cryptocurrency Fairness Act
The introduced act will reduce the tax earnings reporting requirement for Bitcoin, and other cryptocurrency transactions. According to Polis’ official website, the proposed law will treat cryptocurrencies like foreign currencies (with some differences). The main clause is the elimination of reporting requirements for transactions worth under $600.
A slight analogy to forex
The key difference from foreign currency exchange is that fiat currencies do not have any analogous cut-off prices for tax laws to take effect. In fact, the tax structure for currency trading depends on the type of financial instruments that one trades with. 60% of all forex options and futures gains are taxed as capital gains. The remaining 40% is taxed at the higher, short term rate. Albeit complex, people trading foreign currency futures have to report their overall gains and losses at the end of their financial years. Taxes are levied on overall gains and losses.
Despite numerous dissenting voices, global investment patterns have shown an increasing trust in the cryptocurrency phenomenon. It is interesting to see the take of foreign governments on cryptocurrencies.
Virtual currencies around the world
- Australia eliminated double taxes on BTC. Users will no longer have to pay the goods and services tax, in addition to the gains taxes.
- Swiss municipality of Chiasso allows its residents to pay taxes in the form of BTC.
- China is systematically shutting down exchanges.
- North Korea is allegedly increasing mining efforts.
With cryptocurrencies become more popular globally, it will be interesting to see the effect of the Cryptocurrency Fairness Act. One thing is for sure – the cryptocurrency phenomenon is here to stay.