Compliance and consumerism are two key components of legislation aimed at assisting taxpayers who exchange and buy goods with cryptocurrencies, but lawmakers have yet to crack the code for moving the bill.
The Cryptocurrency Tax Fairness Act ( H.R. 3708 ), introduced by House Ways and Means Committee member David Schweikert, R-Ariz., and Rep. Jared Polis, D-Colo., would create an exclusion for de minimis gains for exchanges or purchases using virtual currencies up to $600, indexed for inflation, beginning in 2019. The legislation would also allow Treasury to issue guidance on reporting requirements for virtual currency transactions with recognized gains or losses, a provision that could raise revenue, one lobbyist suggested.
“The goal is to make it easier for people to use cryptocurrency by removing any threat or reporting requirements for transactions under $600, which should cover the vast majority” of transactions, Polis recently told Tax Analysts. “It’s likely that many of those are not reported, but anyone that uses cryptocurrency for purchasing, say, coffee or a book, could potentially be at risk. Generally, people are not filing paperwork for a $3 bagel or coffee,” Polis said.
Taxpayers have been contacting Schweikert’s office with concerns about how difficult it is to comply with their virtual currency portfolio without clear guidance, an aide for the congressman said. Schweikert received a letter from then-IRS Commissioner John Koskinen in June 2017 stating that uncertainty over how to comply with the law when conducting transactions with cryptocurrency was a primary concern at the agency, the aide said.
The IRS has been relatively quiet on the issue, having issued only one guidance document on it, a 2014 notice (IR-2014-36) that classifies virtual currencies as property. Under those rules, any transaction using virtual currencies could be subject to capital gains taxes, depending on the value and whether the currency is held as a capital asset. Accuracy-related penalties under section 6662 and information reporting penalties under sections 6721 and 6722 could also apply.
Ideally, the IRS would create a new asset class for virtual currencies, but the current classification as property was settled on to comport with existing laws, said Jerry Brito, executive director for Coin Center, a think tank focused on cryptocurrency public policy.
Brito called the proposed legislation a “win-win-win,” explaining that consumers would have certainty that small, typical transactions using cryptocurrencies would not be subject to additional capital gains taxes, businesses would be able to offer more payment options via virtual currencies, and virtual currency exchanges would eventually have a set of reporting requirements to work with and could worry less about noncompliance.
Giving Treasury the authority to issue reporting requirements could have broader implications than just improving compliance. Traditionally, the Joint Committee on Taxation has estimated that implementing stricter reporting requirements would raise revenue, and the language included in the Cryptocurrency Tax Fairness Act is “potentially very powerful,” Mary Burke Baker of K&L Gates LLP told Tax Analysts.
There are many questions about what data would be required under potential Treasury guidance, including possibly the basis value of digital currency and what kind of activity could be considered a taxable event, Baker said. Cryptocurrency miners, those individuals whose systems verify virtual currency transactions, present another host of questions about how they should be treated and regulated, Baker added.
Coin Center worked with Polis’s and Schweikert’s offices to develop the legislation, and Brito said his group would focus on educating legislators on the bill this year after the language was not included in the Tax Cuts and Jobs Act (P.L. 115-97). “We made a big push last year during the tax bill passage to include it in there, but the amendment failed in the Rules Committee,” Brito said.
Polis offered the legislation again in the Rules Committee as an amendment to a series of IRS-related bills that passed the House in April, but it was struck down on a party-line vote. Polis said whenever a Ways and Means Committee bill is sent to the Rules Committee, he will try to offer the legislation as an amendment, calling the cryptocurrency bill “fairly noncontroversial.” But Rep. Rob Woodall, R-Ga., told Polis during the Rules Committee meeting that Ways and Means legislation is rarely amended in the Rules Committee, especially with a larger bipartisan package like the IRS legislation.
With a tight legislative schedule in Congress and election season nearing, opportunities to move the Schweikert-Polis legislation will be few, Baker said. But she said issues dealing with the tax treatment of digital currency will persist, and IRS officials have begun to recognize the potential for related compliance issues.
Although it’s unlikely, Schweikert would ideally like a markup on the Cryptocurrency Tax Fairness Act, but like Polis he is looking for opportunities to attach the legislation to related tax measures or to a must-pass bill, a spokesperson for Schweikert told Tax Analysts.
Ways and Means Committee Chair Kevin Brady, R-Texas, was noncommittal when asked whether the cryptocurrency bill could be included in a potential major tax bill this year, but suggested he would work with Schweikert to consider the legislation.