Right now, there is a glitch in tax law created by President Donald Trump’s tax reform bill, also known as the Tax Cuts and Jobs Act of 2017, that inadvertently imposes a harsh tax on cryptocurrency and hurts U.S productivity. This law needs to be changed in a way that leaves these transactions tax free and imposes a tax only when one “cashes out” from cryptocurrency to the dollar. If left untouched, this law will drive even more innovation overseas and further hurt U.S. innovation and entrepreneurship.
For those unfamiliar with cryptocurrency, it is an alternative form of value that people can use in lieu of fiat currency, like euros or the dollar. Cryptocurrency is a digital asset that is frequently exchanged in peer-to-peer networks or ‘exchanges’ that allow one individual to use a cryptocurrency to purchase another cryptocurrency. The transactions are then recorded on something called a blockchain ledger.
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The nature of these transactions creates a more efficient means of purchasing products or services than traditional banking instruments like credit cards. The system has experienced some wild swings in value, yet, over time, the value of these assets will stabilize, and people will eventually use them to purchase goods and services like they use a credit card, debit card or cash.
The Internal Revenue Service (IRS) recently sent letters to the holders of cryptocurrency in an effort to collect taxes from these people. Ryan Ellis wrote in The Washington Examiner last week, “One perennial challenge faced by tax policymakers and regulators is that the real world changes much faster than laws and tax rules do. The latest sign of that cropped up last week, as the IRS announced it was sending 10,000 ‘educational letters’ to taxpayers it suspects had taxable income from cryptocurrencies (such as Bitcoin) in 2018. This comes on the heels of a ‘virtual currency compliance campaign’ the IRS conducted that year. The purpose of these letters is to encourage affected taxpayers to consider amending their tax returns to include this income.”
One problem is that no guidance has been given to the holders of cryptocurrency, and an individual who has made hundreds of crypto-to-crypto transactions will have a very difficult time complying with these requirements. It would make more sense to tax when an individual goes from fiat to crypto and tax the difference from when they convert their crypto back to fiat.
Representative Ted Budd (R-N.C.) has taken a swipe at this issue and introduced a bill to reform the “Like-Kind” exclusion of cryptocurrency from taxation imposed by the Trump tax bill. The blockchain industry is still in its infancy, and different tokens and products should likely be taxed differently, whether they be security tokens, utility tokens or any of the new dynamic emerging products. Without temporary restoration of Like-Kind treatment, we will see tremendous overseas flight of American blockchain and crypto companies to avoid the crippling tax burden and uncertainty in the United States. The Budd bill is a band-aid, because Like-Kind treatment is admittedly not the ideal long-term way to tax all token-to-token transactions, but it makes sense in the short term as the industry matures.
My organization, the Digital Asset Policy Network (DAPNet) is committed to pushing for legislation that would accomplish a few specific goals. First, we need the law changed to stop punishing people who are innovating in the cryptocurrency space through a harsh tax policy that will likely push more innovators overseas rather than collecting any more tax revenue. Second, we need a long-term strategy and a new tax treatment of cryptocurrency that allows for crypto-to-crypto exchanges without any penalty, including retroactivity, to end the current push by the IRS to collect for Like-Kind crypto-to-crypto transactions. Finally, we need a comprehensive legislative fix that promotes, rather than punishes, this growing area which provides an alternative to big banks and credit card companies as a way to increase competition and lower cost for consumers.
Digital assets are the future of “money” and allow individuals to have more freedom from the fees associated with purchasing products and services. It provides a real competition to government printed cash in a way that will make lives better without the constant fees associated with financial institutions who nickel-and-dime people with fees that end up slowing down our economic system. Freedom dictates that individuals should have choice and the freedom to engage in transactions as they choose. Cryptocurrency provides that freedom and will make America even greater, if the government does not screw it up.
Nick Spanos is the co-founder of DAPNet and a blockchain pioneer—read his full bio here.