Senators take a step toward a de minimis capital gains exemption for everyday cryptocurrency transactions
The Virtual Currency Tax Fairness Act has been Reintroduced in the Senate
The Virtual Currency Tax Fairness Act was introduced by Senator Ted Budd and cosponsored by Senators Kyrsten Sinema, Kirsten Gillibrand, and Cynthia Lummis. The bill creates a sensible de minimis exemption from capital gains tax for low-value cryptocurrency transactions in day-to-day use.
Every time someone spends cryptocurrency, a taxable event occurs. Today, if you buy a cup of coffee with bitcoins, you’ll have to calculate and report any gains that you experienced and pay tax on any gains. 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.
Under the Virtual Currency Tax Fairness Act, any transaction under $200 would be completely exempt, so you’d neither have to worry about keeping track of gains or losses on all the little purchases you make, nor would you owe taxes on those small changes. This mirrors the same kind of exemption that foreign currencies enjoy today, and we think it’s a simple and fair way to avoid discouraging the use of cryptocurrency.
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.
We have been advocating for a solution like this for years. We are proud to have worked with Senator Budd and his cosponsors to have this bill reintroduced in the Senate. We look forward to continuing to work to support and promote this policy agenda to ensure clarity in the area of crypto tax treatment.