A Simple Legislative Fix to Complicated Tax Rules for Personal Cryptocurrency Transactions
Congress should Create a De Minimis Exemption for Personal Cryptocurrency Transactions
Existing rules for the taxation of cryptocurrency can make even the simplest of transactions a confusing ordeal to track, record, and report. A legislative fix is needed for everyday transactions, even the smallest of which trigger tax implications.
One of the simplest legislative solutions to support open blockchain networks would be to give cryptocurrencies the same exemption from taxation that government-issued currencies already have: an exemption from taxation for small, personal transactions. A potential bill could create an exemption from capital gains tax for low-value cryptocurrency transactions in day-to-day use when cryptocurrencies are used, just like the dollar, as actual currencies.
Here’s how government-issued currencies already enjoy this exemption: say you exchange $100 for euros because you are spending the week in France. Before you get to France, the exchange rate of the Euro rises so that your euros are actually now worth $105. When you buy coffee or a baguette with your euros, you experience a potentially taxable gain. However, the tax code has a de minimis exemption for personal foreign currency transactions, so you don’t have to report this gain on your taxes. As long as your gains per transaction are $200 or less, you’re good to go.
Cryptocurrencies do not enjoy this exemption because their transactions are treated as non-currency, property transactions. This means that every time you buy a cup of coffee or anything else with bitcoins (using cryptocurrency like an actual currency), it counts as a taxable event. If you have experienced a gain because the price of Bitcoin has appreciated between 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 small the gain. This creates a lot of friction and discourages using Bitcoin or any cryptocurrency as an everyday payment method.
A targeted fix would be to simply create a de minimis exemption for cryptocurrency the way it already exists for foreign currency. The purpose would be to remove the friction and encourage the development of this innovative technology and its use in payments. Without such a de minimis exemption from capital gains taxation, a cryptocurrency user could trigger a taxable event every time she pays for a good or service rendering cryptocurrencies too complicated for daily use in payments — especially in novel micropayment applications where transactions can be just pennies.
We’ve advocated for just such a bill in the past: the Virtual Currency Tax Fairness Act. We’ve worked on a bipartisan basis for several years to support legislators that have introduced this legislation. We also recently highlighted this policy as a priority in our response to a request for feedback from Senate Finance Committee Chairman Ron Wyden and Finance Committee Ranking Member Mike Crapo. Since the bill has not yet been reintroduced this Congress, we wanted to take the time to fully explain why such an idea is necessary.
In addition to treating cryptocurrencies like other currencies when used for small, personal, everyday transactions, cryptocurrency networks also frequently involve tiny transactions that can be worth fractions of a penny. People executing transactions and computational operations on networks like Ethereum often incur small fees. For every small fee on every transaction recorded on the blockchain, users must track the price at which they acquired that minuscule amount and the price at which they disposed of it. Keeping track of each of these tiny dispositions is entirely impractical, however, under IRS guidelines every taxpayer must currently be recording and reporting their gain or loss on each of these small fees. While the IRS guidelines are impractical, they also cast a shadow over the technology, discouraging its use, while the potential revenue accruing to the government is likely to be minimal. This is just another reason why small, personal transactions should be excluded from capital gains taxation.
Giving cryptocurrencies the same exemption that government-issued currencies enjoy would help to foster the use of cryptocurrencies in retail transactions and new innovative methods of transacting that cryptocurrencies excel in, like micro-transactions. Making such a simple fix has been a completely bipartisan issue in the past, and we hope it will continue to be in the future.