Taxing all purchases of Bitcoin will turn against IRS


Joe Colangelo is the founder and CEO of Boxcar, the "parking Airbnb".

The following article is an exclusive contribution to the 2018 series of Crypto and Taxes by CoinDesk.

Bitcoin has an extraordinary way of teaching people very quickly about the law of unintended consequences.

A great example is when the Chinese government began to inspect regulated trade in February 2017. Considering that trades could be closed (they eventually did), buyers rushed to Localbitcoins, a peer-to-peer exchange whose volume rose 3.600% over the course of a month. Trying to monitor and better control bitcoin users in China, the government has taken them to a method that was much harder to monitor.

In the United States, the Internal Revenue Service (IRS) treatment of bitcoin taxation has probably had a similar effect.

By telling taxpayers effectively that they have to calculate capital gains tax for every $ 25 gift voucher bought with bitcoins, the IRS is giving them one more reason to treat bitcoins less as a payment protocol and more like the. digital gold.

But perhaps more important from a public policy perspective, the agency's guide can encourage citizens to use unregulated foreign cryptocurrency exchanges and make transactions using private currencies such as zcash and monero. It is almost certainly a contributing factor to the estimates 0.5% self-assessment Tax times arrive among the bitcoins.

The vast majority of bitcoin users I know understand that paying taxes on short and long term capital gains is not only required by law but also fair. The same can not be said for the taxation of purchases of low-cost items, under the guidance that the IRS issued four years ago.

The guide of 2014

Taking a step back, when that guide came out in March 2014, the market seemed very different.

It had been less than a month since Mt Gox had ceased all withdrawals and a teenager Vitechik Buterin had just introduced a "client that looks like Android that can run app" called ethereum.

I was at Coinsummit 2014 the week the IRS published its guidelines stating that the digital currency would be treated as property, even if it was used to buy baseball caps or MP3s.

At the conference, I asked Vinny Lingham, then CEO of, what support his company could offer to customers who had bought bitcoin gift cards on their platform in the last year.

His answer was that while Gyft could make it easier to track expenses, he would not be able to verify the cost basis of any bitcoins used to make purchases.

As a result, all buyers of these gift cards could: 1) manually track all their purchases, sales, earnings, losses and transfers 2) stop using bitcoins to buy gift certificates or 3) become cybercriminals who do not report part of the their taxes.

I do not think it's a simple coincidence that 2014 was the year the bitcoin community started to forge between those who invested it as a store of value and those who used it as a currency to make purchases. This division has grown only over the years, and led to bitcoin and bitcoin liquidity protocols last year.

To be sure, there were many factors behind the split: from the different incentives between start-ups and other community factions to the deflationary nature of bitcoin and rapid price appreciation.

But ignoring the consumer corner and focusing exclusively on investments and speculation, IRS further encouraged HODLing and discouraged daily purchases with digital currency.

Even the Bitcoin track record as a speculative investment did not disappoint, with the value of the bitcoin of 2,000% since the IRS issued its indications, while the daily transactions (a declaredly unscientific measure of the use of bitcoins as payment method) are simply doubled.

In the interest of IRS

Being an agency strictly focused on maximizing revenue, the IRS is probably indifferent to the way people choose to use bitcoins, provided that earnings and taxes are reported paid.

But by discouraging the use of cryptocurrencies in the real world as money for the purchase of goods, IRS is reducing the incentive for companies in space to build solid tools to track expenses and improve tax reporting.

There could be a simple way for the IRS to mitigate these consequences, though.

A year ago, the Coin Center, a nonprofit research and advocacy center focusing on public policy issues facing cryptocurrency technologies, published a piece titled "The bitcoin taxation is broken. Here's how to fix it".

In this post, Executive Director Jerry Brito said that when bitcoin or other cryptocurrencies are used to buy goods such as coffee or socks, they are used not as investments, but similar to the way foreign currencies are used by Americans to buy goods for sale. # 39; abroad.

Brito continued:

"Suppose you buy 100 euros for 100 dollars because you are spending the week in France Before you arrive in France, the euro exchange rate rises so that the € 100 you bought is now worth $ 105. you buy a baguette with your euros, you get a profit, but the tax code has a de minimis exemption for personal transactions in foreign currency, so you do not have to report this gain on your taxes. "

Implementing a similar one de minimus The exemption for cryptocurrency earnings of less than $ 200, IRS could greatly simplify the tax code in this area and make it more likely that bitcoin users will correctly report their earnings. These ideas are not entirely dissimilar to those I proposed in a Document 2014 on the same subject.

Not only does this bitcoiner saver need to keep records of every weighted purchase they make or live in fear of being prosecuted, but it could also improve overall tax compliance. What's that for counter-intuitive results?

Losing the control image through Shutterstock.

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