Congress Weighs In on Cryptocurrency Taxation

Bipartisan members of the House are advocating for more clarity in the tax law as it relates to taxation of cryptocurrency. First, on April 9, Representative Warren Davidson (R-OH), a member of the House Financial Services Committee, reintroduced legislation that would provide clarity on certain tax and securities law issues related to cryptocurrency.  The bill, entitled the “Token Taxonomy Act of 2019,” resembles the original bill that Davidson introduced in the 115th Congress with Congressional Blockchain Caucus co-chair Darren Soto (D-FL).  The 2019 version of the bill is co-sponsored by Representatives Soto, Josh Gottheimer (D-NJ), Ted Budd (R-NC), Scott Perry (R-PA), and Tulsi Gabbard (D-HI) (who has announced she is running for President). Davidson said in a statement that “[t]he Token Taxonomy Act is the key to unlocking blockchain technology in America.  Without it, the U.S. is surrendering its innovative origins and ownership of the digital economy to Europe and Asia.” The bill would enact a number of new tax provisions.  The new tax provisions apply only to “virtual currency,” which is generally defined as “a digital representation of value that is used as a medium of exchange,” and so would not apply to digital tokens that are not used as a medium of exchange.  The tax provisions of the bill would:

• Expand like-kind exchanges under section 1031 to include virtual currencies. The tax legislation enacted at the end of 2017 limited like-kind exchanges completed after December 31, 2017 to exchanges of real property.  However, taxpayers would still need to determine whether exchanged virtual currencies are treated as “like kind” in seeking to qualify for this tax-deferred treatment.  As a result, the ability to conduct like-kind exchanges of virtual currencies would be uncertain, as it was prior to 2018.
• Create a de minimis exclusion from gross income for up to $600 (indexed to inflation) of gain from certain sales or exchanges of virtual currency for property other than cash or cash equivalents. This provision would help taxpayers avoid recognizing gain when they use appreciated virtual currencies for small consumer transactions.  Under current law, a taxpayer who purchases even a small item—such as a cup of coffee—with appreciated virtual currency generally recognizes gain on the increase in the value of the virtual currency during the time that they held it.
• Authorize the Treasury Department to issue regulations providing for information returns on transactions in virtual currency for which gain or loss is recognized. It is unclear how current information reporting rules apply to many virtual currency transactions.  Guidance from Treasury could be very helpful to taxpayers who want to ensure that they are compliant with tax reporting rules.  However, in order to create an administrable system that is not overly burdensome to taxpayers, the guidance would have to be implemented in a way that is sensitive to the unique issues surrounding transactions executed via blockchain.
• Clarify that an IRA may hold virtual currencies under rules similar to those currently in place for certain metallic coins or bullion.

Although the bill has bipartisan support, the challenge will be to find a vehicle for passage.  Possibilities include an extenders package or disaster relief, but including additional tax provisions will likely face opposition. Second, on April 11, a group of 21 bipartisan members of Congress sent a letter to the IRS urging them to provide guidance on the tax consequences for taxpayers that use virtual currencies.  While the letter acknowledges the 2014 guidance released by the IRS, it stresses that there are still many open questions.  It identified three areas where there is an “urgent need” for guidance:  (1) how to calculate the cost basis of virtual currencies; (2) how to allocate basis to particular lots of virtual currencies; and (3) the tax treatment of forks. Although the IRS has been considering cryptocurrency guidance, it currently has its hands full with implementing the 2017 tax legislation.  It is possible that the IRS will consider “informal” guidance, such as FAQs on its website, as previewed by Commissioner Rettig last November.