Bitcoin
Bitcoin Tax Payments May Happen Sooner Than Investors Think
Crypto Payouts, Even for Taxes, Could Come Sooner Than Investors Think
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As the institutional and regulatory pivot towards more pro-crypto, or at least less anti-crypto, stances and positions continues, there remains one specific area where progress has remained very limited; taxes and tax treatment. While crypto investors and advocates have achieved some success vis-à-vis the SEC, both in court and in terms of public perception, the IRS has been less open to change. In all fairness, it is the IRS’s prerogative to enforce current tax laws and interpret those laws; it is up to Congress to amend existing tax laws before the IRS can change enforcement mechanisms. That said, the IRS has been active in issuing cryptocurrency tax announcements, answering frequently asked questions, and making public comments on these topics; conversations that are often helpful but have not resulted in any changes to tax treatment.
Building on the momentum that has recently gripped Congress in the form of 1) rebuke of SAB 121, 2) House passage of FIT21, and 3) influence of Crypto SuperPACs, Florida Representative Matthew Gaetz has introduced a account that would allow U.S. taxpayers to pay federal taxes using bitcoin. Two of the major changes this bill, if passed, would bring about are a change to the IRS tax code to allow for such a payment option, as well as enlisting the U.S. Treasury to develop and implement a system to allow for bitcoin tax payments to be processed.
The likelihood of this bill becoming law is low, especially as encryption has become a late addition to the list of important issues for the 2024 presidential race, but there are a few factors worth taking a look at.
It wouldn’t be the first in the US
Information that may surprise some cryptocurrency investors is that this proposed legislation is not the first time this has been suggested, but it is also not the first time that paying taxes with bitcoin has happened in the US. Ohio was the first state to launch a pilot program allowing residents to pay certain state taxes and other fees using bitcoin before postponing the program in 2019 due to technical issues. Following this pilot, several other States including Colorado and Florida, both of which allow residents to pay certain taxes and fees using bitcoin.
Regardless of whether or not Representative Gaetz’s proposed legislation moves forward in any material capacity, the fact remains that there is, and has been, an appetite at the state level to allow taxpayers to pay certain expenses using bitcoin. Government mandates and incentives, however, are only one part of the broader crypto story, or the economic appeal of any asset class, and these efforts ignore a fundamental issue.
Do Bitcoin Investors Really Want to Pay Taxes Using Bitcoin?
Who would pay using Bitcoin
Tax policy aside, it’s important to remember that the majority of bitcoin is not likely to be traded, despite retail discussions on social media and recent institutional buying. Even taking into account recent profit-taking amid the 2024 bull market, the percentage of bitcoin that hasn’t moved in the past 18 months remains at more than 60%. Long-term hodlers are not a new phenomenon in the crypto market, but the fact that such a large percentage remains unchanged despite recent market rallies is indicative of bitcoin investors’ apparent low interest in spending their bitcoin holdings.
Beyond the long-term belief that investors have in these assets, and remembering that for many bitcoin is an asset class and investment like any other, the tax treatment and accounting requirements for such transactions represent a significant hurdle. For example, being able to pay federal income taxes using bitcoin is nice, but if every other transaction generates a tax liability, tax reporting obligation, and potential data collection and preparation headaches, this will continue to deter the use of bitcoin as a medium of exchange.
Integrating crypto payments is a good policy
Since it remains unlikely that any bill causing substantial changes to US crypto policy will be passed into law in the short to medium term, analysis of any specific piece of proposed legislation may seem like a moot point. This ignores the larger importance of these proposed changes, as the widespread integration of the idea of crypto payments is a sign of how far the conversation has quickly advanced. Gone are the days when the SEC maintained unchallenged influence over the regulatory conversation, facing several setbacks and a recent lawsuit filed against it by Coinbase. In its place is an environment where, although still controversial and viewed with suspicion by some policymakers, cryptographic and tokenized applications are finally emerging from the shadow cast over the sector by the collapse and criminal activity at FTX.
Cryptographic and other tax payments continue to move from concept to reality; This is good news for crypto and US innovation in general.