Physical imitation of Bitcoins (Photo by Ozan KOSE / AFP) (Photo by OZAN KOSE/AFP via Getty Images)
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Senators Pat Toomey (R-PA) and Kyrsten Sinema (D-AZ) have proposed exempting cryptocurrency transactions of $50 or less from capital gains taxes. While it seems like a modest tax change, it could have profound effects on how crypto is perceived and used. And it would give crypto a tax advantage over other investments.
Like many crypto supporters, Toomey and Sinema appear to want tokens treated as both money and property. To some degree, the history of crypto supports that idea. The first cryptocurrency, BitcoinBTC
, was created to allow peer-to-peer financial transactions without the use of a commercial bank or other intermediary.
And some forms of crypto do seem to function as currency, at least within their limited ecosystems. But much of crypto’s popularity has been fueled by investor speculation and occasional large increases in valuations, not its potential as a cash substitute.
Since 2014, the IRS has treated crypto as property subject to capital gains taxes when it is sold. And it is considered a sale when crypto tokens are used to pay for a purchase.
Toomey and Sinema are just the most recent example of lawmakers who want to grant crypto special—but different— tax status depending on how it is used. Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) proposed legislation in June to allow certain crypto professionals—miners and stakers—to defer tax on compensation paid with crypto tokens until they sell those tokens.
In other words, rather than taxing that compensation as cash wages, the IRS would be required to treat it more like an asset—exactly the opposite of the Toomey-Sinema bill. My TPC colleague John Buhl explains that bill here.
For a typical consumer, the tax benefits of the Toomey-Sinema bill would be modest. It may be hard to imagine given the recent plunge in crypto values, but assume $25 you invested in crypto doubled to $50, which you then used to buy dinner. Under current law, your $25 profit would be taxed at 20 percent. Under the new legislation, it would be tax free. You’d save $5.00 in tax.
More than a consumer tax break
The immediate tax break would be meaningful only to those power users who do most of their shopping with crypto. And to the industry itself.
Make no mistake, that $50 limit on tax-free transactions is only the beginning. You can be sure that backers soon will …….