As I’ve said ever since the IRS issued their woefully inadequate (and ill-conceived) initial guidance on the taxation of cryptocurrencies, the biggest problem with the current policy is that every single transaction generates a capital gain or capital loss for tax purposes. This is just a record-keeping nightmare, and it’s the primary reason my tax filings the last few years have taken hours upon hours to complete, and included dozens of pages of single-spaced spreadsheet records reflecting every one of my crypto transactions during the tax year.
Yes, I calculated (and reported) the random four-cent capital loss here or seven-cent capital gain there when I used bitcoin to buy the proverbial cup of coffee or my favorite “Will Work for Bitcoin” T-shirt. With every transaction, and for every hour I labored over the spreadsheet calculations, I cursed the bureaucrats in D.C. and their nonsensical guidance. And as really smart developers in this space have invented increasingly promising technology to support microtransactions (think thousands of sub-penny transactions as part of a single smart contract), I’ve often wondered why our “friends” in Washington would adopt policy positions that will drive the adoption of such technologies away from the U.S. and toward jurisdictions friendlier to these kinds of innovative–and potentially world-changing–advancements.
By the way, according to data revealed in the court battle over the IRS John Doe summons served on Coinbase, it seems I’m one of the very few Boy Scouts (just over 800 of us) who even bothered to attempt this paperwork exercise from Hell. (And yes, I actually am an Eagle Scout.)
Now there is finally some hope on this front. As I hinted to several of you after my trip to DC a couple weeks ago, there is finally a legislative solution to this problem on the table!
Today (OK, technically yesterday, as I type this after midnight from my hotel room in Paris), Rep. Jared Polis (D-CO) and Rep. David Schweikert (R-AZ) introduced the Cryptocurrency Tax Fairness Act (CTFA), with a lot of help behind the scenes from the great guys at Coin Center. As I was hoping, this bill proposes a $600 de minimis exemption (inflation-adjusted in future years) for gains resulting from crypto transactions. In short, this makes the tax treatment of cryptocurrencies more similar to foreign fiat currencies, at least for small transactions.
When I bought coffee today in Paris using euros I purchased with U.S. dollars earlier in the week, I didn’t have to worry about saving any records, or trying to calculate my capital gain “windfall” of roughly one cent (since the euro has fractionally increased in value against the dollar this week). That’s because we’ve long had a de minimis exemption for gains and losses related to foreign fiat currencies.
Unfortunately, when I bought dinner last night using bitcoin (at the fantastic Restaurant La Pas Sage), I had to make a note of the transaction details so I can calculate my capital gains and pay the tax man. Off the top of my head, I’m probably going to owe the IRS something like $15-25 in taxes come 15 April, 2018, just for the privilege of enjoying some delicious French cuisine paid for with a currency that has appreciated in value vs. the eroding purchasing power of the dollar (or euro, in this case). And it will take me hours of number crunching along with all my other crypto transactions just to calculate the exact tax owed. If this new legislation becomes law, that crazy headache will be a thing of the past.
The other major thing this short bill does is to direct the Department of the Treasury to develop guidelines for providing standardized reporting on crypto gains and losses–something akin to the IRS Form 1099-B your stock broker provides at the end of every year to indicate gains and losses related to your security trades. While I’m no fan of taxes in general, at least this measure would put cryptocurrencies on a similar footing with stocks when it comes to the burden of calculating and reporting your gains and losses. So if you’ve done well investing in crypto, you’re still going to owe the tax man. But at least you won’t have to take days off from your job to calculate what you owe.
Now all that’s left to do is to get this bill passed through the House, get the same legislation through the Senate, and get the President to sign it. More likely, I expect this bill will get attached to the wider tax reform legislation that is being promised. Will this Congress actually deliver? I’m not betting any bitcoins on that one.
For more on the CTFA, see Coin Center’s announcement.