Consumers might be more likely to use cryptocurrencies for everyday retail purchases if legislation introduced by U.S. Senators Pat Toomey (R-Pa.) and Kyrsten Sinema (D-Ariz.) is enacted. Titled the Virtual Currency Tax Fairness Act, the bill was introduced on July 26, 2022 and would update the current Internal Revenue Code (Code) to exempt from taxation small personal transactions that use virtual currencies for goods and services. More broadly, the bill is forward-looking as it would foster use of crypto for everyday retail payments.
Under current law, every time a digital asset is used, a taxable event occurs. In 2014, the Internal Revenue Service (IRS) issued Notice 2014-21 providing guidance to the effect that virtual currencies are treated as property, rather than as currency, for federal tax purposes. As a result, in an exchange of virtual currency for other property, the recipient of the virtual currency is required to treat the fair market value of the virtual currency on the date of the exchange as the "amount realized" in the transaction and the party using virtual currency as a payment medium is required to recognize gain or loss in the transaction equal to the difference between the value of the virtual currency on that date and its adjusted tax basis (generally, its cost). The IRS specifically excluded virtual currency from the rules regarding foreign currency transactions under Section 988 of the Code.
The bill defines virtual currency as a digital representation of value which (1) functions as a unit of account, a store of value, or a medium of exchange and (2) is not a representation of the United States dollar or any foreign currency. Under the bill, current tax rules would be modified so that a party using virtual currency as a payment medium in exchange for property or services for personal use would not be required to recognize gain in the transaction unless the amount of the gain, or the total value of the sale or exchange (i.e., where property other than virtual currency is also used in payment) exceeds $50. The bill would not change the rule requiring the recipient of virtual currency to treat its fair market value as the amount realized in the transaction.
For purposes of determining the applicability of this de minimis exception, the bill would aggregate all sales or exchanges which are part of the same transaction (or series of related transactions). After 2023, it would also account for inflation through the application of a cost-of-living adjustment. Any adjustments would be rounded to the nearest $10.
If enacted, the bill would establish a rule that is similar to a de minimis exception applicable to foreign currency transactions engaged in by individuals (applicable where the amount of foreign currency gain is $200 or less).1 Short of any enactment, however, the bill represents another example of bipartisan leadership on crypto legislation, following the June 7, 2022 release by U.S. Senators Kirsten Gillibrand (D-NY), member of the Senate Agriculture Committee, and Cynthia Lummis (R-WY), of the Responsible Financial Innovation Act – a bill that would create a broad and comprehensive framework for digital assets.
* Michael Buckalew, Financial Services Regulatory Analyst, contributed to this blog post.
1 In February 2022, Reps. Suzan DelBene and David Schweikert introduced a similar bill in the House -- H.R.6582 -- but which has a $200 exemption amount. The House version of the bill remains in the Ways and Means Committee.