Foundation

Cryptocurrencies Offer Safe, Successful Alternative to Physical Currency

by Charles Morris / /

Perhaps few are familiar with cryptocurrencies, but their continued advancement has the potential to bring significant benefits for society. Cryptocurrency refers to digital currency that has the potential to be much safer and more reliable than our current fiat currency. While there are several different cryptocurrencies, Bitcoin is the most well-known. Enabled on distributed ledger platforms like Blockchain, cryptocurrencies are virtually impossible to hack, meaning your virtual wallet is secure. However, in a misguided effort to squeeze additional tax receipts, the Internal Revenue Service (IRS) is blocking this much needed advancement. Only when the IRS simplifies the tax treatment of cryptocurrency, and drops its classification of them as ‘property’ can these currencies be trusted and used in everyday purchases. 

 In the last 5 years, the value of Bitcoin has skyrocketed. In 2012, one bitcoin was worth just under $15. Currently, the value of a bitcoin is around $2500, which is over double what it was worth at the beginning of this year. There are sound reasons for increased worth of this new market. Cryptocurrencies like Bitcoin offer the possibility of easier transactions, protection against inflation, and more financial freedom. Since cryptocurrency trading is peer-to-peer, there is no need to go through a bank or other financial institution in order to complete transactions. It also offers protection against inflation since there is a fixed amount of bitcoin that can exist: unlike paper money, the quantity cannot be increased or decreased by the government. Finally, this new choice of alternative currencies allows consumers to choose to invest in whichever cryptocurrency they believe will yield the best returns. 

 Under its current policy, the IRS treats investing in bitcoin the same as investing in property. On the surface, not treating cryptocurrency as currency could have advantages. For example, property capital gains are taxed at a lower rate than currency investments. The downside is that every transaction using bitcoin is subject to a property capital gains tax. This contrasts with how the IRS treats other currency investments. For example, when $100 is used to purchase €100, and the value of the Euro changes so that the investment is now worth $120, small purchases made using the $20 you gained are not subject to extra gains taxes. This is known as a ‘de minimis’ benefit. In contrast, small purchases, like your daily cup of coffee, can be taxed at rates up to almost 30% when using bitcoin that has gained value. When purchases are made using bitcoin, you are essentially ‘cashing out’ your investment, meaning that you must keep track of the value of bitcoin at the moment of every purchase you make, and report how much was gained since the initial investment. This punishes consumers who intelligently invest and want to spend their gains within our own economy. Policies like this greatly diminish the utility of this new form of currency. Through its misguided tax treatment of bitcoin and other new cryptocurrencies, the IRS is stalling the success and modernization of our economy. 

 Cryptocurrency is quickly gaining legitimacy and value, but in order to attract large investments we must get rid of these barriers. The IRS is taking a heavy-handed and unfair approach to this developing technology. Imagine how the spread of the internet would have been impeded if the government rushed to initiate new taxes at its onset. Foreign nations are adopting cryptocurrency as a large and legitimate part of their economy, and in order to stay competitive the U.S. must do the same. Sweden has seen a surge in bitcoin investment in order to protect investments from banks with negative interest rates. Other countries, including South Korea, the United Kingdom, and Australia are beginning to see a large number of cryptocurrency-based startups that allow their digital economies to flourish. 

 In order to not fall further behind or impede the progress of this technological breakthrough, the IRS should treat bitcoin the same as other currency investments. The federal government should also adopt a clear and concise tax policy with regard to cryptocurrency in order to decrease the guesswork and complexity experienced alike by consumers and sellers when trying to figure out how to file their taxes. As the world becomes more modern, our tax code should not become more complicated. Progress can only be made when everyone is moving in the same direction, and we cannot have this oversized, controlling arm holding back the progress of this new form of currency. 


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