One of the biggest problems bitcoin and other cryptocurrencies face as a mechanism for making payments is taxation, an issue so complex that they make it beyond impractical on a day-to-day basis.
That’s something Sen. Cynthia Lummis, R-Wyo., intends to fix with her eagerly awaited Responsible Financial Innovation Act, which she described as a “bill to fully integrate digital assets into our financial system.”
Read also: Sen Lummis’ Christmas Present to Crypto: Clear Regulation in the New Year
A strong crypto proponent and bitcoin owner since 2013, the freshman senator said she is working with colleagues and crypto industry advocates to put “the final touches” on it in a Wednesday (March 9) Twitter announcement.
It’s been a long time coming, but my bill to fully integrate digital assets into our financial system is almost ready! I’m putting the final touches on it with some key advocates and partners in the Senate, but watch out for an unveiling soon! pic.twitter.com/gpHh2JVgKd
— Senator Cynthia Lummis (@SenLummis) March 9, 2022
The next day, Lummis had her state policy director, Tyler Lindholm, discuss the bill she has been working on since last year with The Daily Decrypt podcast.
Lindholm described the goal of the legislation as providing clarity to the digital asset industry and retail cryptocurrency users on several issues, most notably taxation and codifying the amendment to last year’s $1 trillion infrastructure bill that sought to prevent a badly worded definition of “broker” from making it impossible to legally mine or validate cryptocurrency.
A Capital Idea
The biggest issue, by far, is capital gains tax as it applies to cryptocurrencies.
Specifically, that means applying an exclusion for small sales, Lindholm said. The senator is currently looking at $600, he said. He added that Lummis would like it to be higher but that the Senate may only pass a bill with a lower amount.
“What we’re really looking at there is just integrating digital assets into the system of taxation,” Lindholm said.
Currently, the law views any gain from the sale of a cryptocurrency as a taxable event, which doesn’t sound particularly unreasonable. But the devil is in the details.
The IRS requires people to determine whether they made money from the sale of crypto by comparing its price from the day it was purchased and the day it was sold. Again, fairly reasonable.
However, at present that means any gain, no matter how small. The industry’s favorite example is buying a $5 cup of coffee every day with bitcoin, for example with a crypto debit card or your PayPal account.
See more: When It Comes to Accepting Crypto in Payment, Taxes Are Very Taxing
If you acquired that bitcoin for $3.75, for example, you’d owe taxes on $1.25. And as the IRS requires that all capital gains be listed separately, you’d need to figure that out 365 times — with the amount changing every day based on the highly volatile price of bitcoin.
Now factor in the fact that you may have bought bitcoin multiple times and dumped it all into one wallet. Then figure out how much you paid for the particular bitcoin used to buy that coffee, and then the value when you spent it. And keep in mind, bitcoin has been known to rise and fall as much as 10% in a day.
While some card providers and exchanges provide that information, the sheer scale of it would mean even buying a daily coffee would require the services of an accountant — probably one specialized in the field of cryptocurrency. Using BTC on a day-to-day basis for many purchases would be — and technically is — effectively impossible, even though the IRS hasn’t brought an enforcement action yet.
High Stakes
Another way the bill would impact capital gains, Lindholm said, is to clarify that it does not apply to what he called “productive” activities, in which you aren’t selling the asset earned.
Most notably, this means earning “block rewards” of newly minted cryptocurrency coins by validating transactions so they can be added to a blockchain. That’s mining in the case of proof-of-work blockchains like bitcoin and ethereum, or staking crypto in the case of proof-of-work blockchains such as “Ethereum killers” like Cardano, Solana or Avalanche.
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It’s a doubly serious problem in the case of staking, as many people simply lend the staker their crypto in exchange for a share of the newly minted coins, generally leaving the earnings in the staking pool.
“The current gray area is that you might be accruing a capital gains taxable event under proof of stake as it stands right now, even if you’re just delegating,” said Lindholm.
Notably, Decrypt said, the IRS has said that tokens earned through proof-of-work are taxable on the day they are mined.
Lindholm said the bill would also allow people to pull money from retirement accounts like 401(k)s and IRAs to reinvest in crypto without early withdrawal penalties and other tax hits. Currently, there is no effective way to directly invest retirement account savings in cryptocurrencies.
The Infrastructure Fight
Finally, Lummis’ bill would seek to codify the changes 99 senators unsuccessfully sought, to add to the $1 trillion infrastructure bill last year.
Related reading: Crypto’s Influence Shows as Treasury Promises Protection for Miners, Stakers
That would have clarified that miners and stakers are not “brokers” for the purposes of collecting know-your-customer (KYC) information — something they could not do as they had no access to that personal information.
While the IRS has said it would not read the law as written in the now-passed act in the way crypto industry advocates feared, that promise has no force of law.
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