Blockchain
Tax payments in Bitcoin could happen sooner than investors think
Cryptocurrency payments, including for taxes, may be arriving sooner than investors think
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While the institutional and regulatory shift toward 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 been able to achieve some success with the SEC, both in court and in terms of public perception, the IRS has been less open to change. In fairness, it is the IRS’s prerogative to enforce and interpret current tax laws; it is up to Congress to change existing tax laws before the IRS can change enforcement mechanisms. That said, the IRS has been active in issuing crypto tax announcements, answering FAQs, and making public comments on these topics; conversations that are often helpful but have not led to any changes in tax treatment.
Building on the momentum that has recently gathered steam in Congress in the form of 1) rebuke of SAB 121, 2) passage of FIT21 in the House, and 3) the influence of Crypto SuperPACs, Florida Representative Matthew Gaetz has introduced a I count that would allow U.S. taxpayers to pay their federal taxes using bitcoin. Two of the major changes this bill, if passed, would bring about are an amendment to the IRS tax code to allow for such a payment option and the enlistment of the U.S. Treasury to develop and implement a system to allow tax payments to be processed in bitcoin.
The odds of this bill becoming law are low, especially since cryptocurrencies were a late addition to the list of top issues for the 2024 presidential election, but there are a few factors worth considering.
It wouldn’t be the first in the United States
One piece of information that may surprise some cryptocurrency investors is that this bill is not the first time it has been suggested, but it is also not the first time that taxes have been paid in bitcoin in the United States. 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. After this pilot, many others States including Colorado and Florida, both of which allow residents to pay certain taxes and fees using bitcoin.
Regardless of whether or not Rep. Gaetz’s proposed legislation moves forward in any material capacity, the fact remains that there is, and has been, a state-level willingness to allow taxpayers to pay for certain expenses using bitcoin. Government mandates and incentives, however, are only part of the larger story of cryptocurrencies, or the economic attractiveness 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 most bitcoin tends not to be traded, despite retail discussions on social media and recent institutional buying. Even taking recent profit-taking into account in the context of the bull market in 2024, the percentage of bitcoin that has not moved over the last 18 months remains at over 60%. Long-term hodlers are not a new phenomenon in the cryptocurrency market, but the fact that such a high percentage remain unchanged despite recent market rallies is indicative of the apparent lack of interest among bitcoin investors in spending their bitcoin holdings.
In addition to the long-term belief that investors have in these assets, remembering that for many bitcoin is an asset class and investment like any other, the tax treatment and accounting requirements for such transactions present a significant obstacle. For example, being able to pay federal income taxes using bitcoin is fine, but if every other transaction generates a tax liability, a tax reporting requirement, and potential headaches with data collection and preparation, this will continue to dissuade l use of bitcoin as a medium of exchange.
Integrating cryptocurrency payments is a good policy
Since any bill that would cause substantive changes to US crypto policy remains unlikely to become law in the short to medium term, analyzing any specific piece of proposed legislation may seem like a moot point. This does not take into account 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 moved. Gone are the days when the SEC wielded unchallenged influence over the regulatory debate, facing multiple setbacks and a recent lawsuit filed against it by Monetary base. In its place is an environment where, while still controversial and viewed with suspicion by some lawmakers, crypto and tokenized applications are finally emerging from the shadow cast over the industry by the collapse and criminal activity of FTX.
Cryptocurrency payments for taxes and more continue to move from concept to reality; this is good news for cryptocurrencies and US innovation in general.