Nov 22, 2019 00:45 PM | Kyle Torpey

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Today, almost no one is using Bitcoin and other cryptocurrencies for everyday payments. There are a few different reasons for this, including Bitcoin’s price volatility, but that’s far from the only problem. While Bitcoin has become a more stable store of value over time, the tax implications of using Bitcoin for payments remain an impediment to widespread use. 


While some Bitcoin enthusiasts have no issue with breaking or bending the law to avoid capital gains taxes on cryptocurrency payments, the mainstream consumer does not necessarily want to take that kind of risk. This issue around capital gains taxes on Bitcoin payments was debated by Bitrefill CEO Sergej Kotliar and ShapeShift CEO Erik Voorhees at the Bitcoin 2019 conference over the summer.


But it’s not just about willingness to play by the rules. Even those who are perfectly willing to pay taxes on Bitcoin payments are faced with headaches and complicated accounting just to make sure they aren’t breaking the law.


Spending Bitcoin is a Taxable Event in Many Countries


In many countries around the world, using Bitcoin to pay for goods or services is a taxable event. For example, if someone buys some Bitcoin and then uses that Bitcoin to pay for a new TV after the  BTC/USD exchange rate has increased, then taxes must be paid on those gains. When Bitcoin is used to buy something, it’s effectively the same as a sale of Bitcoin from a tax perspective.


“In Japan as well as the US, tracking every single payment in cryptocurrencies (Bitcoin and others) is required for tax reporting,” Cryptact CEO Amin Azmoudeh told Longhash.


Koinly CEO Robin Singh told LongHash that this tax-related issue with Bitcoin payments is found in most jurisdictions around the world. According to Coin Central, Belarus, Portugal, and Singapore are examples of places where capital gains taxes do not get in the way of using Bitcoin and other cryptocurrencies as a payment mechanism.


Stablecoins are another unique case where capital gains taxes are less problematic, because stablecoins are supposed to track the value of the local fiat currency.


“What we have seen with stablecoins in general is that you always end up with a negative gain due to the fees you paid to acquire them and the fact their value doesn't change (or changes very little),” said Singh.


Of course, stablecoin users could still face tax-related issues in situations where the stablecoin is backed by a non-domestic fiat currency or a basket of currencies, which is how Facebook’s Libra project is expected to work. In that setup, there could still be situations where the stablecoin appreciates against the user’s local currency and creates a taxable event.


Although these tax-related issues are not necessarily a huge issue today, they could turn into a serious usability issue as cryptocurrencies are used more frequently for payments. For now, crypto assets are still largely bought and sold for speculative investment purposes.


“Bitcoin investors are not exactly invested in the currency because they want to use it to pay for goods either -- the price fluctuations, the dreams of becoming rich are still what fuel investments in the coin,” said Singh.


Can This Problem Be Solved with Code?


Perhaps there could be an automated solution to this problem. According to Singh, whose company helps cryptocurrency users properly report their taxes, tracking cryptocurrency expenditures can be made simpler than tracking transactions in the traditional financial system.


“Unlike credit cards or cash, tracking crypto is a very straightforward process, all you need is your wallet address and you have your complete transaction history in a universal format,” said Singh.


 “Really all someone has to do is enter their wallet address and they have a complete report that can be sent in to the IRS. Compare that to downloading quarterly PDF reports from your bank and manually entering them in a tax software. The bottom line is, even though the additional tax obligation may pose a challenge - it can be easily overcome, the bigger challenge is gaining enough traction to make cryptocurrencies all they’re hyped to be.”


Azmoudeh also holds the belief that software can be used to automate some of the tax-related pain points of using cryptocurrencies for payments, although he also sees regulatory uncertainty as a lingering issue.


“The ledger and tax portion of our platform service is, at its simplest, a comprehensive aggregate ledger that combines transactions from all sources (exchanges, wallets, P2P) to create a chronological (or periodic) record in order to be able to calculate accurate cost basis at the time of payment or exchange,” explained Azmoudeh. “The other problems with cost basis is that the accounting for particular transactions (airdrops into your wallet, hard forks of your existing coins) are not always clear depending on your jurisdiction.”


The services made available by Koinly and Cryptact, however, are not built into the software used by the vast majority of cryptocurrency users. While some exchanges send out automated tax reports based on each customer’s own activity, this is still not a widespread practice and does not provide the entire picture in terms of a particular user’s total capital gains owed – they could be using multiple exchanges for example.


Additionally, many users move their funds to non-custodial wallets where there is no automated reporting, which makes tackling the problem much more complicated. There are also likely a large number of users who are unaware of the tax implications of their cryptocurrency-powered purchases in the first place.


Law Changes Could Help


In addition to better Bitcoin wallet software, it’s also likely that changes to tax codes or at least clarity on taxable events could be helpful. In the United States, Coin Center has helped push for a bill that would treat Bitcoin and other cryptocurrencies in a manner similar to traditional foreign currencies when it comes to capital gains taxes. The general idea is to create an exception for taxable events when someone is using Bitcoin to buy a good or service with a total cost of $600 or less; however, this proposal has not gained any serious traction as of yet.


Cypherpunks and other most hardcore Bitcoin believers may believe that the interests of government tax collectors are irrelevant, but the average person may not feel comfortable breaking the law every time they want to buy a coffee with some cryptocurrency. That means that if Bitcoin is going to become a mainstream means of payment, then changes to the tax code may be necessary.


Actions taken by the Internal Revenue Service (IRS),the Canada Revenue Agency (CRA), and other tax collectors around the world this year indicate cryptocurrency users’ activities are being watched closely, so those who aren’t paying their capital gains taxes whenever they use cryptocurrency to pay for something may be in for a rude awakening.


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