Paying capital gains tax on everyday expenses is not appealing to many, so it’s understandable that there is some concern around the soon-to-be launched Bakkt solution. Amongst other things, the Intercontinental Exchange (ICE) venture would provide Bitcoin-to-fiat conversions for businesses simplifying exchanges between merchants and consumers.
As merchant adoption goes, the Bakkt offering appears ideal: it would enable integrating businesses to accept crypto without needing to worry about properly understanding ,or even handling it. The company’s partnership with Starbucks means that before long, cryptocurrency enthusiasts will be able to spend their coins at their local coffee shop.
A brief primer on cryptocurrency and tax law
In the US, cryptocurrency is treated as property for the purposes of taxation. This means that any trade (whether crypto-to-crypto, fiat-to-crypto, or payments made in crypto) must be logged to later calculate tax before being reported to the IRS. It’s already proving difficult for traders using more than one exchange to effectively track their crypto investments, and that’s before widespread commercial acceptance.
Just as with every trade on an exchange, coffee purchases in Bitcoin need to be recorded. This poses a challenge for its mainstream prospects, as purchases made in USD would be preferential to navigating tax responsibilities.
It’s not as bad as it seems
Realistically, the initial fears around tax laws getting in the way of using cryptocurrency as currency may be somewhat misguided. Non-profit research and advocacy organisation Coin Center have discussed ways that legislation may be amended with a de minimis exemption to cover cryptocurrencies such that fluctuations in price are disregarded.
What’s more, it seems as though the Token Taxonomy Act is gaining traction. Introduced in a bill by Congressman Warren Davidson (R) and Darren Soto (D) last year, the Act would revise the Securities Act of 1933 and the Securities Exchange Act of 1994 to codify the treatment of tokens and cryptocurrencies.
Perhaps most notably, it would exempt “other than cash or cash equivalent” transactions from taxation, on the condition that they do not exceed $600. That is, buying a cup up coffee for less than $600 is exempt, but cashing out a few hundred dollars is still subject to tax.
These amendments to existing laws would require a significant amount of momentum and backing to pass, though it’s hard to deny that they’re a step in the right direction towards mass adoption of cryptocurrency.
Exempting transactions trades one headache for another. Even in the case of exemptions that make cryptocurrency usable in daily commerce, maintaining an audit trail would still be necessary to prove that crypto was disposed of in a compliant manner.
For this, the best way forward is for individuals to use software solutions that automatically log, flag exemptions and calculate taxes at the end of the tax year. When it comes to taxation, the best strategy is always to have an accurate and transparent record of trades.
The future of cryptocurrency is indisputably widespread adoption. As regulators slowly come to terms with the nuances of the emerging technology, illogical legislation that hinders this goal will likely soften and adapt to reflect growing interest across the board.
By Sean Ryan and Perry Woodin, founders of NODE40
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.