The federal government taxes cryptocurrencies as “property.” Income, if there is any, is taxed at regular income tax rates and changes in prices are treated as capital gains or losses. This treatment means that every transaction requires computation of the capital gain or loss in terms of US dollars.
Transactions using foreign currencies, in contrast, do not require paying capital gains tax for gains under $200. There is no reason not to treat cryptocurrencies the same way. Indeed, there have been several proposals to do exactly that.
For example, Robert F. Kennedy, Jr. proposes eliminating capital gains taxes on de minimis transactions in cryptocurrencies. “De minimis” is a legal term from Latin that means “sufficiently unimportant that it can be ignored.” A $200 gain is regarded as de minimis for foreign currencies. Why not for cryptocurrencies?
The Virtual Currency Tax Fairness Act has been submitted to Congress in recent years, including the current session of Congress. The 2024 bill would eliminate the tax on a de minimis amount of $200 and index that amount by inflation.
Taxing cryptocurrencies as property is no more of a problem for cryptocurrencies held as an investment than for corporate stock. Corporate stock has had this tax treatment for many years.
Taxing cryptocurrencies as property makes it more costly to use cryptocurrencies to buy or sell goods and services. If a buyer pays dollars to purchase a gallon of milk, he does not incur a tax on the dollars. (He may incur a sales tax on the value of the milk, but this is a separate issue.) If, instead, the buyer pays with a cryptocurrency, he must compute the capital gain or loss on the cryptocurrency and determine his tax. First, he must identify the dollar price of the cryptocurrency at the time it was acquired. Then, he must determine the dollar price of the cryptocurrency when the milk was purchased. The change in the value of the cryptocurrency in dollars is the capital gain or loss. Finally, he must determine the capital gains tax rate that applies to the transaction.
That’s a lot of calculating to purchase a gallon of milk. Moreover, he must perform a similar calculation for every cryptocurrency transaction.This extra work raises the cost of using cryptocurrencies in transactions and limits their use in transactions. Even today, some people have long lists of gains and losses on cryptocurrencies to send to the Internal Revenue Service.
It is not hard to improve this situation: eliminate capital gains taxes on cryptocurrencies used in smaller transactions. A capital gains tax on small gains, for example a gain of one dollar, is absurd: the tax rounds to zero dollars because tax forms ignore pennies.
A common complaint by those who would like to eliminate cryptocurrencies is that cryptocurrencies seem more like financial assets than monies. Treating cryptocurrencies like property for tax purposes discourages people from using them like monies. By reducing the cost of using cryptocurrencies in small transactions, treating them like foreign currencies for tax purposes would encourage people to use them like monies.
Treating cryptocurrencies like foreign currencies might seem like an unimportant change, but it isn’t. Early cryptocurrency proponents suggested they might be used (among other ways) to make micro-payments on the Internet. For example, the Basic Attention Token lets people pay for content and advertisers pay people for viewing advertisements. This and similar schemes might well be more widely used if cryptocurrencies were treated like foreign currencies for tax purposes. Instead, they are treated like property. That means the associated taxes are either a pain if computed or a gray area if ignored.
Cryptocurrencies should be taxed in the United States on the same basis as foreign currencies. This would be a big change in the taxation of cryptocurrencies and might have big effects on how much they are used.