One of my favorite parts of being a crypto blogger is that I get to meet and interact with people from all over the world. I enjoy learning from different people, and over the past few weeks, I have learned that cryptos are taxed quite differently in other countries compared to the US. For example, in the US, buying everyday items with crypto incurs a tax. In France, it does not. The difference in tax laws creates a different incentive system and thus people in different countries will view the crypto use case differently. In the US, the tax system encourages buying and holding; in other countries, the system is more supportive of purchasing every day items with crypto. This article isn't intended to be a tax guide for US residents; rather, it is intended to provide a general overview of US tax laws to help people in other countries understand the peculiarities of our system and the importance of a "de minimis" exception.
All Crypto Is Income
First and foremost, any crypto received is treated as ordinary income. Whether I earn crypto from mining or receive BTC for painting my friend's house, it is treated as ordinary income. I must pay taxes according to my income bracket.
Every Disposition Incurs A Capital Gain
One of the biggest differences between the US and other countries is that any disposition of crypto is counted as a sale of crypto. As we saw in the French example, crypto to crypto transactions occur in a safety bubble. In other countries, purchasing or selling fiat from crypto is taxable, but purchases made in crypto are protected. Whether I am selling my crypto for fiat or using crypto to pay for a purchase, I still must pay a capital gain tax.
So, even if I go to the store and buy a cup of coffee (priced in BTC) with BTC, the government views me as having sold my BTC for fiat and then making the purchase in fiat....even if there was no fiat involved in the transaction and the BTC goes straight from my wallet to the merchant's wallet with zero fiat intermediary.
The reason that this is so problematic for US residents is that we must compute cost basis for each "sale" of crypto when making a purchase. I'll demonstrate why this is a challenge in the example below.
Airdrops and Forks
Airdrops and forks count as income as well the basis is determined as of the time of the airdrop. Whether of not you asked for the fork or not, it is counted as ordinary income and is taxed at the tax rate corresponding to your income. The only exception is for forks that have no market value or are inaccessible. For example, suppose that I hold Tezos on Coinbase and Tezos forks to Tezos Prime and distributes Tezos Prime to all wallets holding Tezos.
If Coinbase doesn't support Tezos Prime and I can't access that Tezos Prime, it appears I wouldn't be liable for that tax since I can't effectively control that asset. However, if I gain control of the asset at some point in the future (Coinbase adds Tezos Prime support) then I would be liable for the tax on the airdrop. The cost basis would be computed as of the day I gained access to the Tezos Prime, not the day of the actual airdrop.
No "De Minimis" Exception
Often, countries will institute a de minimis exception that allows citizens who make small purchases with foreign currency not to have to pay tax. The logic is that any such appreciation from very small transactions would generate very little tax revenue for the government and be a trivial matter. In other words, the government recognizes that the gains from commerce outweigh the benefits of receiving such a small amount of tax revenue from the transaction and chooses not to burden their citizens with excessive compliance requirements for such small transactions.
For example, if someone goes to Canada and exchanges USD for Canadian Dollars to buy a hamburger, they wouldn't have to calculate basis and appreciation for the CAD used to buy the hamburger.
Unfortunately, the most recent guidance is that the US tax authorities will NOT implement a de minimis exception which means that even small, trivial purchases would need to be reported and capital gains would have to be calculated.
Any economist will tell you that incentives influence behavior, and the US tax system is a clear example of how the tax law influences crypto behavior. In the US, the system is much more favorable to HODLing. Someone who buys crypto and sells it several years later would only need to pay a long term capital gains tax which is usually quite low. By contrast, if I earn crypto from providing a service, I would be taxed on that as normal income. When I "sell" that crypto to purchase a coffee, I would not only be taxed, but I would have to go back and calculate cost basis to determine how much I needed to pay. My point isn't to say that we shouldn't pay taxes; I'm just pointing out that this is quite burdensome for something as small as buying a coffee and will make day-to-day crypto usage quite impractical.
As a quick example, lets suppose that I get paid .1 BCH for writing a business plan for my friend's non-profit organization. For the simplicity of calculation, assume that BCH is priced at $200 USD on the day I received it. I would be liable for taxes on earned income of $20 (price of BCH * 1/10 BCH received). Now suppose that a few weeks later, I wanted to buy a watch. Thankfully, I have found a store where I can pay directly in BCH, and the watch is conveniently priced as .1 BCH.
In a different country, it might be possible to simply exchange the .1BCH for the wallet, but in the US, I must calculate my basis and capital gain. Let's suppose that BCH is $250 on the day that I purchase my watch. My BCH is now worth $25, so the difference between my basis of $20 and $25 is $5. Since this is a short term capital gain of less than a year, this $5 price increase would be considered ordinary income and taxed at my 22% tax bracket for an additional tax of $1.10.
That was a simple example, but now suppose that instead of receiving .1BCH all at the same time, I received four separate payments of .025 BCH. I would have to calculate my basis and capital gains for each BCH used to purchase my watch. Obviously, this increases the complexity and creates quite a burden for something as simple as ordering a coffee or purchasing a watch.
Whether we focus on stocks, bonds, real estate, or crypto, taxes are going to be a fact of life for investors. At the same time, it is important to understand how the tax code influences investor's decision making process. The current system strongly discourages using crypto in day-to-day transactions, but is more favorable to long term HODLing. I totally understand that the government needs money to operate, but at the same time, I believe that there would be significant economic benefits by encouraging more crypto usage in small day-to-day transactions. I think a small de minimis exception would be a good compromise that preserves the government's ability to generate revenue from crypto while also encouraging the economic freedom and innovation associated with increased cryptocurrency adoption.