The debate over cryptocurrency policy is intensifying in Washington, D.C., especially after notable figures like former President Donald Trump and Senator Cynthia Lummis voiced support for a Bitcoin reserve. However, a less-publicised but significant proposal in Congress seeks to simplify the use of cryptocurrency by creating a tax exemption for everyday transactions.
The Challenge of Capital Gains Tax
Cryptocurrency was initially envisioned as a new form of money. Yet, capital gains taxes complicate its use in daily transactions. For instance, buying a coffee with Bitcoin requires the buyer to calculate the capital gains tax, which involves reporting the sale price, cost, and timeline of the transaction. This tax, which encourages long-term holding, inadvertently discourages the use of cryptocurrency as money.
Legislative Efforts
In response, Senators Cynthia Lummis, Ted Budd, Kyrsten Sinema, and Kirsten Gillibrand introduced the Virtual Currency Tax Fairness Act to the 118th Congress. This bill proposes a de minimis exemption from capital gains tax for low-value transactions. Specifically, purchases under $200 made with cryptocurrency would only be subject to sales tax, similar to existing exemptions for foreign currency transactions.
Limitations and Conditions
The proposed exemption has some limitations. It applies only to purchases of goods or services, not to cashing out holdings or transactions made with the intent to resell. Additionally, the bill aggregates related transactions to prevent users from structuring purchases to stay below the $200 threshold. While the aggregation rule may be complex, it could be clarified and the threshold increased with future amendments.
Significance of the Proposal
This tax exemption proposal addresses a significant barrier to the broader use of cryptocurrency. Although discussions around a U.S. Bitcoin reserve have captured headlines, the potential impact of reducing tax burdens on everyday crypto users should not be overlooked.
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