Proposed Taxation of Cryptocurrency

Take-Away: A couple of ‘competing’ bills in Congress now seek to bestow special tax status for cryptocurrency, reflecting its dual-purpose.

Background: Does cryptocurrency function as currency, or is cryptocurrency more of a speculative investment, when large increases in its value are its hallmark, not its potential as a cash substitute? The dual-purposes of crytocurrency seems to produce the desire to minimize its future taxation when either purpose is involved. The cryptocurrency ‘industry’ and its promoters apparently want global tax relief for its dual-purpose.

Cryptocurrency as Property: Since 2014, the IRS has treated crytocurrency as property that is subject to capital gains taxes when it is sold. A ‘sale’ results when cryptocurrency tokens are used to pay for a purchase. Yet some in Congress are not totally satisfied with this basic ‘classification’ with regard to its taxation and they seek something of a consumer tax-break when cryptocurrency is used in a transaction.

Toomey/Sinema Proposal: Senators Pat Toomey and Krysten Sinema have proposed exempting cryptocurrency transactions of $50.00 or less from capital gains taxes. While a modest tax change, if adopted this proposed legislation could have a profound effect on how cryptocurrency is perceived and used. Moreover, it would give cryptocurrency a tax advantage over other investments. If you sell an appreciated asset to raise cash to pay for living expenses, that sale triggers a capital gain. Cryptocurrency would be an exception to this normal tax result.

Question: Why should cryptocurrency be treated differently from any other type of appreciated asset?

Example: Betty invested $25 in a crypto, which doubled to $50. Betty uses the $50 of crypto to purchase a dress. Under current law, Betty’s $25 ‘profit’ would be taxed at 20%. Under the proposed Toomey/Sinema bill, there would be no tax, meaning that Betty would save $5.00 in tax.

Gillibrand/Lummis Proposal: Senators Kirsten Gillibrand and Cynthia  Lummis propose  a different tax status for cryptocurrrency, depending on how it is used. Their proposed bill, filed in June,  would allow certain cryptocurrency professionals, i.e. ‘miners’ and ‘stakers,’ to defer tax on compensation paid with crypto tokens until they actually sell those tokens. Rather than tax the cryptocurrency compensation as cash wages, the IRS would be required to treat it more like an asset. In other words, this bill is exactly the opposite of the Toomey/Sinema bill in how cryptocurrency is viewed.

Observation: Cryptocurrency is promoted as both an investment and as money. A current example of this dual-purpose is the recent tv ad from the crypto exchange Kraken. Crypto promoters want its dual-purpose reflected in government regulation: (i) when consumers use crypto to make purchases, promoters want the IRS to treat it as money; (ii) when miners and stakers receive cryptocurrency as compensation, they want the IRS to tax its as property. And no surprise, they clearly want to keep the SEC as far from cryptocurrency as possible.

Conclusion: One day cryptocurrency may truly function as alternative currency. As for the present, it is largely an investment, not money, and that is how it is primarily being marketed. It will be interesting to see how the tax law changes, if at all, in light of these two proposed bills.