October 13, 2017 by: Michael Collins
So maybe you own some Bitcoin but, like my 6 year old with tooth fairy money, it’s burning a hole in your pocket. Maybe you are eyeballing a new video card for that mining rig to capture some more NEO and get GAS from newegg.com or you might just be picking up a much-needed microvelvet lounger for the pooch at overstock.com. The good news is you can pay for all of this with just a little bit of Bitcoin.
Well, under today’s rules, those purchases result in a capital gains (or loss if your timing is as bad as mine). That is because the IRS currently identifies Bitcoin as property. They laid the groundwork for this treatment in Notice 2014-21 (click here to read n-14-21), which I personally believe was rushed just to get something out there as cryptocurrencies began growing exponentially in popularity and there was no previous guidance as to the tax treatment.
Our friends in the U.K. have a little more breathing room than we do here in the U.S. While the IRS equivalent in the U.K. identifies Bitcoin and other cryptos similarly, as property, they also give each tax payer an exemption of £11,100 (around $14,000 US dollars) so that those spending it like cash don’t get hammered with capital gains taxes. They actually have capital gains taxes there too – even spelled the same but read it in your best John Oliver voice for the most accurate pronunciation.
Here in the US, we currently have no exemption so every single Satoshi of Bitcoin you spend is treated like a property sale and subject to either long-term (hopefully) or short-term (not hopefully) capital gains taxes depending upon how long you held it (or, better yet, how you identified it – which I will explain in a future column). Every single transaction. Even the .000213 BTC fee on an exchange of two other coins. In the stock exchange world, transaction fees can simply be added as part of the cost of the transaction and get added to the basis. In the crypto world, the fee itself is its very own transaction, treated from the current IRS perspective as a unique sale of property on its own. Note to self – if an exchange will accept USD for transaction fees, pay it with that and just add the fees in as part of the basis of the acquired coin. That would also save a lot of cost on these exchanges that are slow to adjust the crypto rate as the value of the coin increase against the U.S. dollar. More about that in a later column too.
With all of this incredible hassle to just spend Bitcoin in the United States, how will it ever truly catch on and be perceived widely as a viable alternative currency, rather than a black market of criminals who aren’t paying taxes anyway?
Enter our heroes, Representative Jared Polis, D-Colo., and Representative David Schweikert, R-Ariz., who serve as chairmen of the Congressional Blockchain Caucus. In recognition of the challenges faced in its growing adoption, the Caucus was formed during the 114th Congress in February of 2017 to educate and inform policymakers on blockchain technology and help the United States remain competitive in the international arena.
Polis and Schweikert introduced The Cryptocurrency Tax Fairness Act of 2017, which by its very name and the fact that they belong to different parties, suggests bipartisan understanding of the dozens of complaints generated by my last column that paying capital gains taxes on every single transaction is just “not fair.” I could use other quotes besides “not fair” but I’m trying to avoid an R- rating.
As the IRS strong-arms exchanges into revealing the potentially unreported, tax-consequential activities of their customers, Polis and Schweikert seem to have taken the stance that at least part of the blame for low self-reporting falls on the IRS for providing only vague guidance for taxpayers and preparers about the tax treatment of something with hybrid-like characteristics such as cryptocurrencies.
Prior to the introduction of The Cryptocurrency Tax Fairness Act of 2017 in September, Polis and Schweikert sent a letter to the Commissioner of the Internal Revenue Service, John Koskinen, requesting that the IRS “clarif[y] how to properly tax these forms of transactions.” Polis expanded by saying, “I look forward to hearing from Commissioner Koskinen and receiving clear-cut guidance for how digital currency users report their taxable income.”
The opinion of Polis and Schweikert seems clear that buying a soda from a Bitcoin-friendly vending machine should not trigger a capital gains tax situation and that eliminating capital gains taxes on at least some of the day-to-day transactions is exactly what they hope to accomplish. Like in the UK, the Act would exempt transactions under a certain amount from triggering a taxable capital gain. Unlike in the UK, the exemption is not $14,000 US, only $600. That is not anywhere close to where I would like see it, and this Act still has a long way to go before it becomes reality, but it is a huge step in the right direction as recognition of the legitimacy of cryptocurrencies in the United State continues to gain ground.
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© Michael L. Collins
10 thoughts on “What is The Cryptocurrency Tax Fairness Act of 2017 and how could it affect my Bitcoin transactions?”
I have a question. Does the IRS only tax when cashing in my bitcoin for fiat cash or is it also taxable when I transfer my bitcoin from coinbase to another exchange for vertcoin?
Hi, Christopher. Under the current guidance form the IRS (which is essentially to treat it like property) the transfer of bitcoin from one exchange to another is not in itself a taxable event. If a fee for the transfer is taken in Bitcoin or another altcoin, the portion alotted for the fee does create a taxable event. Typically these transaction fees are very small and may not amount to enough to report unless you have many. The trading of bitcoin for Vertcoin does create a taxable event. with the exchange of these coins, you are deemed to have sold the Bitcoin for USD at its current market value, generating a reportable gain or loss, and to have purchased the Vertcoin with USD at its current market value by which you establish the basis (or cost) of the Vertcoin to use to determine a gain or loss on the future sale of the Vertcoin.
can i ask you if participating in ICO’s are illegal for US residents ?
I’m no expert on this but I believe it depends upon how the ico is classified. The Securities and exchange commission is cracking down on ico’s due to the prevalence of fraud in so many cases. A great resource I use to better understand this is the bad crypto podcast on iTunes or google play. Their have a special ico offering episode each week which is really informative. http://badcryptopodcast.com/ is their web page if you want more info.