Finally, a Break for Crypto Users: Senators Push for Long-Needed Tax Exemption

A Long-Awaited Break for Crypto Users

In the heart of Washington, D.C., the buzz around Bitcoin policy has reached new heights, especially after former President Donald Trump, Senator Cynthia Lummis, and presidential candidate Robert F. Kennedy Jr. publicly backed a strategic Bitcoin reserve during the Bitcoin 2024 conference in Nashville.

But while that made headlines, another significant proposal has been quietly making the rounds in Congress. And frankly, it's long overdue: a push to exempt low-value cryptocurrency transactions from federal taxation.

A Capital Gains Conundrum

Cryptocurrency has evolved into various roles for different people, but one of its original goals was to function as a new form of money. Unfortunately, capital gains taxes have thrown a wrench in that vision. Imagine the headache of trying to buy a simple cup of coffee with Bitcoin—thanks to these taxes, it’s anything but straightforward.

The Taxman Always Knocks

Sales tax, typically added at checkout, is the easy part. But with crypto, you're on the hook for calculating capital gains tax. This means digging into the sale price, cost, timing, and the profit or loss on every single transaction, then painstakingly recording it all on Schedule D of Form 1040. And let’s not forget, these tax rates are designed to reward long-term holding, not spending. It's like Uncle Sam saying, "Sure, you can use your money—just not anytime soon."

The Crypto Tax Dilemma

The complexity and discouragement brought on by capital gains taxes create a serious barrier to using cryptocurrency as everyday money. No wonder most people shy away from spending their digital coins, regardless of how many "Bitcoin Accepted Here" signs they spot.

Senators to the Rescue?

Thankfully, some members of Congress are on the case. In July, Senator Cynthia Lummis, along with Senators Ted Budd, Kyrsten Sinema, and Kirsten Gillibrand, introduced the Virtual Currency Tax Fairness Act in the 118th Congress. According to Landon Zinda of Coin Center, this bill proposes a "sensible de minimis exemption" from capital gains taxes for low-value crypto transactions—finally making it easier to use cryptocurrency in everyday life.

What’s the Catch?

So, how would this exemption play out? Essentially, if you use cryptocurrency to buy something under $200, you'd only need to worry about the sales tax. This proposal aligns with existing laws that provide similar exemptions for foreign currency transactions. But there's a caveat: the exemption only applies to purchases of goods or services, not to cashing out or flipping assets for profit.

A Few Wrinkles to Iron Out

While the senators' focus on small consumer purchases is clear, the bill does have a quirk: it aggregates related transactions. This seems aimed at preventing people from breaking up purchases to dodge the $200 limit, but the practical limits of this rule remain a bit murky. However, tweaking this condition and even raising the threshold are simple fixes that could be addressed down the road.

Cutting the Red Tape

Amid all the hype about the U.S. government potentially hoarding Bitcoin, let's not forget the importance of reducing red tape and making cryptocurrency more accessible for everyday Americans. This proposal, long overdue, is a step in the right direction.