3 Ways US Congress May Approach Bitcoin Taxation

With the U.S. Internal Revenue Service looking to enforce more stringent Bitcoin tax compliance, several stakeholders say Congress should step in to clarify the way virtual currencies should be treated for tax purposes. The following are three possible ways lawmakers could approach bitcoin taxation.

‘De Minimis’ Bitcoin Taxation Exemption

Using bitcoin and cryptos for microtransactions could cause tax headaches since the IRS classifies virtual currencies as properties. To this end, some commentators say bitcoin taxation laws should include a de minimis exception.

Such an exception would see the crypto owners not needing to pay taxes on crypto transactions below a specified limit. Both the Cryptocurrency Tax Fairness Act and the Token Taxonomy Act before Congress set a de minimis exemption for bitcoin taxation at $600.

As previously reported by Bitcoinist, critics of the de minimis exemption approach say it places a greater burden on the IRS. Some stakeholders remark that crypto owners will use the exemption to game the system and evade crypto taxes altogether.

‘Like-Kind’ Exchange Exemption

Despite the IRS classifying cryptos as property, crypto-crypto trading pairs still trigger a taxable event. This situation opens up double taxation issues — crypto traders have to pay sales and capital gains taxes on crypto-crypto pairs.

Congress could pass a law that places cryptos under the limited like-kind exchange exemption paradigm. With such an exemption, crypto owners will only have to report and pay taxes when trading cryptos for ‘real assets’ or converting them to fiat currencies.

Treating Bitcoin as Currency for Tax Purposes

Another school of thought is pushing for classifying bitcoin and other cryptos as currencies. Abandoning the property designation for cryptos in the U.S. will see transactions under $200 exempted from bitcoin taxation.

Like the de minimis exemption, Congress classifying cryptos as currencies will see microtransactions no longer becoming a tax headache. Such a move could be significant for broader bitcoin adoption.

However, moving cryptos from the property to currency domain might create even more problems for the IRS. Treating cryptos as property has so far allowed the IRS to rely on a significant number of legal precedents in shaping bitcoin taxation guidelines.

In the absence of any steps by Congress, the IRS continues to drive bitcoin taxation, issuing warnings to crypto owners against tax evasion. Recently, the IRS refunded tax-paying crypto users who correctly reported their taxes with sufficient records of their cryptocurrency transactions.

Which of these approaches do you think Congress should adopt in creating a definitive framework for bitcoin taxation? Let us know in the comments below.

Images via Shutterstock