The new cryptocurrency tax bill: "If it ain’t 'broker', don’t fix it!"

HR 3684 (INVEST in America Act) allocates funding to rebuild transportation systems and support clean energy developments, among other investments. It aims to pay for these new projects in part by raising revenue from the taxation of cryptocurrency. But cryptocurrency has historically proven an elusive field of taxation and these new provisions have many in the investment community up in arms. To understand this hot button issue, and the broader implications for crypto enthusiasts, we first need to understand how these assets work and how they are currently taxed.

A cryptocurrency is a secure form of virtual currency, a digital representation of value that is neither issued by a central bank nor attached to a fiat currency. This can take many forms, from frequent flyer miles to gold in your favourite online videogame. But whereas these forms of virtual currency exist in closed or limited-use systems, cryptocurrency can be converted into legal tender based on its determinable market value, thus enabling it to be used as a de facto substitute for more traditional, recognised currencies.

Cryptocurrency has been a mainstay in the financial news pages for years, primarily for two reasons: 1) the potential of the technology to disrupt established markets with its inherent qualities, in particular its anonymity, rapidity, and lack of geography; and 2) the technology’s potential to create overnight millionaires. The first and most well-known cryptocurrency, Bitcoin, has increased in value from just a few dollars to almost USD 50,000 in less than a decade. Recent years have additionally seen the rise to prominence of many other cryptocurrencies such as Ethereum, Litecoin and Dogecoin, each of which has its own characteristics.

IRS guidance considers cryptocurrency as analogous to property rather than traditional fiat currency, meaning it is taxable as a sale or exchange of property and potentially subject to capital gains tax. Even the act of generating the coins is subject to tax. Mining cryptocurrency is considered a business activity, and the generation of coins must be recognised as income equal to the fair market value of the amount generated. Additionally, if this activity is not undertaken as an employee in a business, it may be subject to self-employment tax.

But the very attributes that make cryptocurrency so appealing have made it notoriously diffcult to tax effciently. Cryptocurrency is, by nature, anonymous and untraceable. As a result, there currently exists a wide gap between taxes owed and taxes paid and closing that tax gap has been a priority for the IRS as well as the new administration.

Continue reading this article, and "A Guide to the Taxation of Cryptocurrency" here. 

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