Two members of Congress have introduced a bill that would exempt from income tax transactions under $600 conducted using Bitcoin or other digital currencies. Currently, the Internal Revenue Service treats digital currencies like Bitcoin as property, meaning that on every transaction using Bitcoin, the taxpayer must recognize either a gain or loss for tax purposes depending on his or her basis in the digital currency and report such gain or loss on an income tax return. The IRS does not recognize any de minimus transaction amount, meaning that a taxpayer using Bitcoin to purchase a cup of coffee must recognize gain or loss on the transaction. Representatives Jared Polis (D-Colo.) and David Schweikert (R-Ariz.), co-chairs of the Congressional Blockchain Caucus, have introduced the Crytocurrency Tax Fairness Act of 2017 to exempt small purchases with digital currency up to $600 from tax reporting and burdensome recordkeeping requirements.
In a press release announcing the bill, Rep. Polis said that “[c]ryptocurrencies can be used for anything from buying a cup of coffee to paying for a car, to crowdfunding a new startup and more and more consumers are choosing to use this type of payment. To keep up with modern technology, we need to remove outdated restrictions on cryptocurrencies, like Bitcoin, and other methods of digital payment. By cutting red tape and eliminating onerous reporting requirements, it will allow cryptocurrencies to further benefit consumers and help create good jobs.”
Rep. Schweikert added that “[i]ndividuals all over the world are starting to use cryptocurrencies for small every day transactions, yet here in the States we have fallen behind and make cryptocurrency use more of a challenge than it needs to be. “With this simple legislative change, anyone can make digital payments to buy a newspaper or a bike without worrying about tax code challenges.”
According to their press release, Polis and Schweikert relaunched the Congressional Blockchain Caucus in February. The caucus educates, engages, and provides research to help policymakers implement smart regulatory approaches to the issues raised by blockchain-based technologies and networks. Blockchain is a decentralized distributed ledger that is the main technology powering cryptocurrencies such as Bitcoin and Ethereum. By using math and cryptography, blockchain supplies a decentralized database of every transaction involving value. This creates a record of authenticity that is verifiable by a user community, increasing transparency and reducing fraud. Crytocurrencies, like Bitcoin and Ethereum, are used for purchases, trade, and payment across the globe. The estimated value of the cryptocurrecy economy is $162 billion.
Meanwhile, the IRS is continuing its aggressive efforts to identify the users of digital currency through litigation involving a “John Doe summons” on Coinbase Inc., a leading virtual currency exchanger. The IRS believes that because virtual currency transactions are difficult to trace, offer relative anonymity, and lack third-party information reporting, taxpayers may be using them to hide taxable income. In a press release announcing the John Doe summons, then-Principal Deputy Assistant Attorney General Caroline D. Ciraolo, head of the Justice Department’s Tax Division, said that “[a]s the use of virtual currencies has grown exponentially, some have raised questions about tax compliance. Tools like the John Doe summons authorized today send the clear message to U.S. taxpayers that whatever form of currency they use – bitcoin or traditional dollars and cents – we will work to ensure that they are fully reporting their income and paying their fair share of taxes.” According to the IRS, there is a significant reporting gap between the number of virtual currency users reported by Coinbase during the period 2013 through 2015 and the total number of taxpayers reporting gains or losses to the IRS during that same period (807, 893, and 802, respectively). In addition, it has been reported that the IRS is utilizing Chainanalysis software to identify owners of virtual currencies.
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