Tax Authorities Are Making Bitcoin Unspendable
Tax reporting burdens make Bitcoin impractical for payments.
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Bitcoin’s lack of widespread acceptance by merchants and use by shoppers isn’t just because of the perceived technological barriers and a lacking ecosystem. Tax complications also plague would-be BTC spending.
Three popular narratives have developed to explain why Bitcoin isn’t being used more widely to buy and sell goods and services. One is the relatively small number of outlets — online and offline — that accept Bitcoin and other cryptocurrencies as payment. That is due to a lack of infrastructure and the complexities of off-ramping from crypto to fiat.
The second is cryptos’ notoriety for price volatility, making it risky for merchants to accept digital assets. The third is that many Bitcoin holders are refraining from spending it in anticipation of price appreciation. But a further impediment is also stymieing Bitcoin use at the retail level — taxation.
Tax Treatment of Cryptocurrencies
The way tax authorities treat cryptocurrencies in different jurisdictions varies widely: property, assets, commodities, and in rare cases currencies. But almost universally, a sale of a cryptocurrency is treated as a taxable event.
When it comes to crypto traders, there is some logic to that approach. Taxation agencies tax any gains made from selling a crypto for a higher price than that for which it was bought. That event is subject to capital gains tax.
But complications arise when you sell Bitcoin to buy something. If the Bitcoin you sell is worth more at the time of purchase than it was when you bought it (relative to the relevant fiat currency), the sale of it is treated as a capital gain. That applies whether you sell it back into fiat, for another crypto, or for products from a merchant.
As ShapeShift’s Erik Voorhees told a Bitcoin 2019 conference in San Francisco recently, “Even if they’re totally cool with the volatility, even if they totally understand the technology, even if they’re okay with a $5 fee on a $50 transaction — having to spend a while reporting that and tracking that and the risk of not tracking that correctly actually becomes the real cost.”
Tax agencies were quick to classify cryptocurrencies and create regulatory frameworks around them to ensure their use would not be tax-exempt. In the U.S. and Japan, for example, users need to track every single crypto transaction they make if they want to fully comply with regulations.
Very Few Crypto Tax Havens
Coin Central notes that there are very few crypto ‘tax havens’ in the world. Portugal, Belarus, Malta, and Singapore are the only jurisdictions that tax crypto gains at zero percent. Crypto gains are also not taxable events in jurisdictions where they are illegal or not recognized, but that equates to a tax-free by accident scenario.
There are other tax lenient countries, such as Germany, which does not tax capital gains from crypto if they are held for over a year. Peru taxes crypto capital gains at five percent.
Meanwhile, the IRS isn’t stopping at capital gains. In the U.S., crypto ATMs and kiosks are being targeted for their perceived ability to enable money laundering. Tax concerns are not the biggest deterrent to the more widespread use of cryptocurrencies. But they don’t help.