A bill previously introduced by Washington Representative Suzan DelBene aims to exempt crypto users from paying taxes on transactions under $200.
According to a Tuesday draft of the Virtual Currency Tax Fairness Act of 2022, Washington Representative Suzan DelBene is seeking to amend the Internal Revenue Code of 1986 to exclude gains from certain personal transactions of virtual currency. If signed into law, the bill could stop the Internal Revenue Service, or IRS, from requiring U.S. filers to pay taxes on capital gains from crypto transactions of $200 or more.
“Antiquated regulations around virtual currency do not take into account its potential for use in our daily lives, instead treating it more like a stock or ETF,” said DelBene. “Virtual currency has evolved rapidly in the past few years with more opportunities to use it in our everyday lives. The U.S. must stay on top of these changes and ensure that our tax code evolves with our use of virtual currency.”
Congress has received different versions of the bill on two other occasions, with neither receiving a vote. In 2017, Representative David Schweiker proposed a bill exempting crypto transactions under $600 in addition to co-authoring the current version with DelBene. The two lawmakers reintroduced the bill in 2020 under the same name, lowering the threshold to $200. Pro-crypto Representatives Darren Soto and Tom Emmer co-sponsored the 2020 bill as well as the most recent iteration.
“As consumers increasingly use cryptocurrencies to complete everyday transactions, we must modernize their tax treatments,” said Emmer in a statement to Cointelegraph. “This common-sense bill will finally allow Americans to use their digital wallet as seamlessly as cash.”
With tax season approaching in the United States, many crypto users are responsible for reporting gains on crypto holdings. However, residents typically do not have to pay capital gains taxes for HODLing, but rather only if they sell, exchange, or transfer their tokens. The proposed bill suggests the changes to the tax code would apply for transactions made after Dec. 31, 2021.
Related:Things to know (and fear) about new IRS crypto tax reporting
Under current U.S. tax law, the rate on capital gain events is roughly 20%. The deadline for residents to file taxes on both crypto and fiat income is April 18.
A United States couple suing the federal tax agency over Tezos (XTZ) staking rewards taxation chose to forego a tactical victory and engage in a court battle that could eventually result in policy change.
Joshua and Jessica Jarrett, who run a node on the Tezos network (thus “baking” new blocks, in the ecosystem’s lingo), have sued the Internal Revenue Service (IRS) over the taxes paid on the XTZ tokens created in 2019. The Jarretts filed a refund claim on upwards of $3,000 paid on the tokens, which the IRS ignored.
The fundamental point of contention underlying the lawsuit is the classification of staking rewards as either taxable income or created property, which is not taxed until it is sold. The Tezos bakers argue that earning coins by staking is akin to baking a cake or writing a book, and thus these coins should not be treated as taxable income.
Related:Crypto staking rewards and their unfair taxation in the US
On Feb. 3, Joshua Jarrett released a statement that the U.S. Government has offered a refund of the taxes in question as part of the settlement. Jarett said that “At first glance, this seemed like great news,” but he later realized that without a court ruling, there would be nothing to prevent the tax service from taxing his staking rewards again. Jarrett said:
A year and a half into this process, the government didn’t want to defend the position that the tokens I created through staking were taxable income. […] I need a better answer. So I refused the government’s offer to pay me a refund.
Jarrett’s statement further indicates that his ultimate goal is to get the IRS to clarify its position on taxing staking and block rewards “for both Proof of Stake and Proof of Work” systems. He maintained that, while no guidance exists on this matter, the tax authority’s concession in his case could be interpreted as support for the position that staking rewards are not taxable income.
Reid Yager, former staffer at industry advocacy group Proof of Stake Alliance (POSA), stated:
The decision by the IRS and DOJ to offer a refund without taking steps to correct poor policy places American businesses and American innovation at risk.
A subsequent court ruling on whether staking rewards are taxable income or not will likely become a critical juncture for the PoS industry.
The head of the Central Board of Direct Taxes (CBDT) in India said the recent announcement of a 30% tax on crypto holdings doesn’t necessarily make the crypto trade legal in India.
The finance minister of India announced a 30% tax on crypto holdings during the budget session on Feb. 1, triggering several headlines on the lines of “India legalizes crypto” However, CBDT chief JB Mohapatra aimed to debunk these misconceptions.
Mohaptra in a post-budget presser said that the new crypto tax would help the income tax department measure the depth of the digital currency market in the country. He also stressed that imposing a tax on the nascent crypto market doesn’t necessarily legalize its trade in the country. He explained:
“The crypto trade or the digital assets transactions do not ipso facto become legal or regular just because you have paid taxes on that.”
LIVE | Digital assets to be taxed at 30%. But what are digital assets? #Cryptos & #NFTs? Why no #tax relief for the middle class? Watch JB Mohapatra, Chairman, CBDT and Vivek Johri, Chairman, @cbic_india@NayantaraRai #BudgetWithETNOW #Budget2022 https://t.co/ZToktkeag7
— ET NOW (@ETNOWlive) February 1, 2022
The tax department chief added that the legality of the crypto trade could be determined only after a clear national framework is introduced in the parliament. However, he justified the tax imposition claiming it would help the department to track illicit activities associated with digital assets. He also advocated for regulating the crypto market to track the flow of money going in and out of the digital asset ecosystem.
Related: India to introduce 30% crypto tax, digital rupee CBDC by 2022–23
The Indian government has been working on crypto regulatory frameworks since 2019 but has been only recently introduced a crypto bill. Some crypto exchange operators called the 30% tax progress, stating that the government has come a long way from its early days when it was looking to impose a blanket ban and jail terms for crypto-related violations.
Thailand recently quashed its 15% tax proposal on crypto transactions after facing backlash from retail market operators. South Korea also delayed its 20% tax proposal due to a lack of clarity on crypto regulations.
Down in Bogotá, cryptocurrency adoption is raging on. Colombia’s tax authority, the DIAN, (Dirección de Impuestos y Aduanas Nacionales de Colombia) has begun to catch up. It seeks to take “special measures” to crack the whip on cryptocurrency tax avoiders.
In a statement released on January 28th, the DIAN stated that it would attempt to better regulate the cryptocurrency space, to work toward a more “honest” Colombia. The statement admits that Bitcoin (BTC) and cryptocurrency use is growing worldwide:
“Currently, operations with crypto assets are a reality worldwide and with the boom in the use of so-called virtual currencies or cryptocurrencies, the DIAN has initiated actions aimed at to control the taxpayers who carry out operations with them.”
In effect, the DIAN wishes to establish a framework that would establish a tax control for “omitted” or “inaccurate” taxpayers. That includes Colombian citizens who failed to record income obtained from crypto operations, or those recording inaccurate cryptocurrency activities.
It comes as little surprise as Colombia is an increasingly active country for Bitcoin and crypto adoption. Colombia is consistently the second most active Bitcoin trading country in Latin America according to usefultulips.org, an online service tracking peer-to-peer BTC trading across the world.
Meanwhile, a search on Coinmap shows hundreds of merchants and ATMs across the country for Bitcoin services. Indeed, according to the Venezuelan newspaper El Nacional, there are 687 Bitcoin-friendly retailers in Colombia.
While hardcore crypto libertarians may roll their eyes at the tax authorities attempting to regulate the space, the move may in fact be encouraging for greater crypto adoption. Recent news, as well as the DIAN’s approach to regulation, would suggest that Colombia’s institutions are in fact warming to crypto.
Currently, Colombia’s laws dictate that its financial institutions are prohibited from protecting, investing, brokering, or managing cryptocurrency operations. However, Colombian citizens can invest, and some legacy financial institutions are paving the way for greater adoption of cryptocurrencies in the country known as the “gateway to South America.”
In March last year, one of Colombia’s oldest banks, Banco de Bogotá, surprised incumbents, announcing it would explore crypto-related services as part of a regulatory sandbox project. The Winklevoss twins’ Gemini trading firm has since partnered with a rival bank, Bancolombia, for clients to trade four crypto assets: Bitcoin, Ether (ETH), Litecoin (LTC) and Bitcoin Cash (BCH).
It would appear the Colombian government consents to crypto, launching a game that teaches young people how to invest in the stock market and cryptocurrencies in September 2021.
Related:Volatility, hyperinflation and uncertainty: How everyday Venezuelans are using stablecoins to protect their livelihoods
Nonetheless, before jumping to conclusions that Colombia may become the next Latin American country to adopt Bitcoin as legal tender, understand that the DIAN’s efforts are simply an attempt to fight tax evasion.
The country will need to up its user numbers, trading volumes and win over more government ministers before such a move could take place.
Thailand has decided to suspend the implementation of its 15% cryptocurrency capital gains tax for now. The proposal, which was presented earlier this year, triggered a lot of opposition, but it appears that some sort of crypto tax will still be implemented.
Thailand will reportedly not proceed with its 15% cryptocurrency tax plan after traders in the nation expressed strong opposition, according to The Financial Times. On income taxes, tax officials said that earned profits from cryptocurrency trading or mining are taxable as capital gains.
The Thai Revenue Department had intended to tighten oversight of cryptocurrency trading after seeing a substantial increase in the size and value of the market in 2021. However, industry stakeholders have issued dire warnings that heavy taxation may stifle the future development of the nascent sector.
The Thai Finance Ministry first announced its intention to tax the crypto market in January, but it was considered difficult in practice. For instance, it wasn’t clear if the taxes would be levied on yearly reports or whether the government will force exchanges to deduct them at the source.
Related:Thailand to define ‘red lines‘ for crypto in early 2022
Last week, the Bank of Thailand, Ministry of Finance, and the Securities and Exchange Commission announced that they will provide regulations for particular digital assets that do not endanger the financial system.
In terms of cryptocurrency regulation, governments are focused on taxation, investor protection, and anti-money laundering. Because of DeFi and NFTs, the asset class has experienced a significant expansion in terms of adoption in recent years.
Several nations, particularly South Korea, have been considering how to tax the cryptocurrency market. After a lot of resistance, South Korea has delayed its crypto tax plan until 2023.
Cryptocurrency portfolio tracker and tax calculator CoinTracker has attained “unicorn” status after raising $100 million in Series A financing, demonstrating once again that investors are allocating vast sums of capital toward crypto-focused companies.
The Series A investment round was led by California-based venture capital firm Accel, with additional participation from General Catalyst, Initialized Capital, Y Combinator Continuity, 776 Ventures, Coinbase Ventures, Intuit Ventures and Kraken Ventures. Individual investors who participated in the round included former Stripe COO Hughes Johnson, Coinbase board member Gokul Rajaram and Jeremy Liew, an early investor in Affirm and Snapchat.
With the capital raise, CoinTracker’s total valuation grew to $1.3 billion, making it the latest unicorn to be crowned in the crypto industry. In the startup world, unicorns are companies that have attained a valuation of at least $1 billion.
CoinTracker said it will use the funds to meet the growing demand for complex tax reporting tools within the crypto industry. It will also expand its human resources and broaden its coverage of exchanges, chains and wallets. The company says it has over 500,000 users and tracks over $20 billion worth of crypto assets across 25 blockchains and over 300 exchanges. Its user count has grown fivefold since April 2020 when it first amassed 100,000 users.
The new US infrastructure bill has been signed by President Biden. The bill imposed restrictions on businesses handling cryptocurrencies and mandated digital asset transactions worth more than $10,000 shall be reported to the IRS. https://t.co/gxdeK2LVJa
— Cointelegraph (@Cointelegraph) November 16, 2021
When asked about the biggest issues crypto holders face with respect to tax compliance, CoinTracker co-founder and CEO Jon Lerner told Cointelegraph that keeping track of transactions across multiple exchanges leads to challenges calculating taxes accurately. “Complexity is exploding,” he said, explaining:
“Calculating that capital gain or loss can be difficult, especially considering it could have been acquired from a variety of places and transferred across exchanges and wallets over time. To make matters worse, users are increasingly using cryptocurrency across more exchanges, decentralized tools, and chains, as well as use cases like store of value, DeFi, NFTs, payments, and more. Complexity is exploding.”
As Cointelegraph reported, CoinTracker’s platform became available to users of Coinbase, one of the world’s leading digital asset exchanges, in January 2021, which was right around the time that the Internal Revenue Service (IRS) was calling on the exchange to take a stronger position on tax evasion. CoinTracker’s platform enables users to report the transaction and sale of thousands of cryptocurrencies in a more accessible way.
Crypto was once again in the crosshairs of the IRS and federal regulators with the passing of the Infrastructure Investment and Jobs Act in November 2021. The new law is expected to generate $28 billion in tax revenue from the crypto industry over the next ten years due to changes in how regulators classify brokers, as well as other reporting requirements.
Related:Crypto heavyweights back inflation-resistant savings protocol
Regarding venture capital’s continued interest in the crypto space amid the recent market downtrend, Lerner said that “most of the top tier technology investors have recognized that the cryptocurrency industry is here to stay, given its enormous potential and upside.” These investors don’t let volatility impact their investment decisions because they focus on companies with strong fundamentals.
NFT text, written on a notebook with calculator,pen on officebackground.
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The creative process of individuals, and the medium through which a Creator works, is constantly expanding, including digital assets such as Non-fungible Tokens. NFTs that are created, bought, sold or exchanged are considered property by the IRS, and so these are taxed like art buying, selling or exchanging art.
For the Creator of an NFT
For the Creator, the minting of the NFT is not a taxable event, but, where creating the NFT is due to their personal effort (or the effort of someone who is creating the NFT for them) or the NFT is part of the Creator’s trade or business, then the gain from the sale or exchange of the NFT is taxable as ordinary income.
A Creator can receive a percentage of the subsequent sale proceeds. When the Creator receives such a payment on a subsequent sale, that payment is also considered to be ordinary income, much like payments of royalties on copyrights, patents and other intellectual properties. Since those payments are perpetual, those rights cannot be depreciated.
Beyond the Creator: Investor, Hobbyist, Business Collector and Dealer
Once the NFT leaves the hands of the Creator, the owner is categorized as one of four types of owners: the Investor, Hobbyist, Business Collector or Dealer, each of which have different tax considerations. Which category a taxpayer falls into would depend on the facts and circumstances of that taxpayer’s case.
Following is a brief introduction to the four categories.
The Investor
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An Investor is a person who buys, sells and collects NFTs solely as an investment with the hope the asset will appreciate to enable sale at a profit. For an Investor, generally the NFT investment when sold is taxable as a capital gain unless it falls outside the definition of capital asset. IRC § 1221 defines capital asset to include all assets except inventory for the taxpayer’s trade or business.
An Investor can be classified as a Dealer or a Hobbyist instead of an Investor based on the facts and circumstances in their case. Sometimes Investors want to be classified as Dealers when they have losses to be able to deduct the loss as ordinary income rather than as a capital loss.
The Hobbyist
An owner of NFTs is presumed to be a Hobbyist. A Hobbyist is a collector who buys NFTs without considering whether it will ever be a profitable investment. Because of the tax disadvantage of being a Hobbyist, the Hobbyist often tries to be classified as an Investor.
The Business Collector
A Business Collector does not buy the NFT for resale but rather for a business purpose such as office display or decorative logo used in the ordinary course of trade or business. Because the useful life of an NFT is not determinable, it is generally not subject to depreciation (unlike copyrights and other IP interests). Facts and circumstances need to be reviewed in each individual case to determine the categorization of the activity.
The Dealer
The Dealer is one who buys and sells NFTs as a trade or business. NFT Dealers are taxed in the same way as any other retail operation. As such all income including income from the sale of NFT is taxed as ordinary income. Expenses, if ordinary and necessary, are deductible. Dealers sometimes want to be classified as Investors because of the favorable capital gains rates versus being taxed on said gains as ordinary income. Additionally, Dealers can wear the hat of Investor in NFTs as well as Dealer in NFTs keeping the two as separate activities.
Installment Sales
Installment sales are where you sell a highly appreciated asset in return for an installment agreement. In an installment sale, you only pay tax on the gains and the interest as they are paid out to you.
Trades involving NFTs
Trades are a common income issue. Trades occur when an owner trades NFTs for other NFTs or Cryptocurrencies. Trades are treated in one of three ways:
Recorded on the books as non-taxable. The basis of the new item received is the same as the item given up, plus any cash or property received to make the values equal (this amount to equalize the value is sometimes called “the boot”). Any such boot received would be reported as income.
Recorded as a taxable event. The basis of the new item is its fair market value, or cost.
A hybrid method using parts of both methods.
Despite clear law on the recognition of income from the exchange of inventory, trades are still often treated as non-taxable events, with the industry claiming they have always done it this way and/or that fair market value is hard to determine. Irrespective, an adjustment to a taxable event is required.
Charitable Contributions of NFTs
The computation of the amount of a charitable contribution, limitations that affect the amount of the allowable deduction and other aspects of charitable contribution are beyond the scope of this brief introduction. However, there are issues involving charitable contributions of NFT that the private taxable collector should be aware of. In many cases, the owner of an NFT partners with a charity to sell the NFT at auction, with the proceeds going to the charity, and using the net sale price as the value for charitable purposes.
Conclusion
There is currently relatively little case law specifically on the income taxation of the sale, exchange or donation of NFTs. The Treasury treats cryptocurrency as cash for reporting purposes, but the IRS treats transactions involving cryptocurrency, including NFTs, are to be treated as property. Until the rules are clearer, following the rules on the income taxation of art is the best insurance against possible penalties and interest.
