Bill to allow cryptocurrency for tax payments passes first reading

Bill to allow cryptocurrency for tax payments passes first reading

But will the IRS charge payers with capital gains tax on top of their payment for…well, taxes?

A bill allowing residents to pay their taxes in cryptocurrencies has just passed its first reading required in Arizona. Should it pass all three readings required, Arizona would be the first US state to implement the law, with Illinois and Georgia closely following their footsteps. The bill, according to Rep. Jeff Weninger, would make it more convenient for residents to settle their tax obligations and could also possibly attract more businesses into the state.

“It’s one of a litany of bills that we’re running that is sending a signal to everyone in the United States, and possibly throughout the world, that Arizona is going to be the place to be for block chain and digital currency technology in the future,” Arizona State Rep. Jeff Weninger said. “The ease of use, being able to do it in the middle of the night, being able to do it at home while you’re watching TV. I think in a few years this isn’t even going to be a question.”

While the volatility of cryptocurrencies has made it severely attractive due to the possibility of huge profits, government agencies receiving such payments are not likely to benefit from its trade potentials and are required to convert them into US dollars within 24 hours of receipt.

This sounds like a win for cryptocurrencies in general, but it brings to question a redundancy from the IRS. Under their virtual currency guidance, they say that cryptocurrencies will be treated like assets subject to capital gains tax. Transactions involving cryptocurrencies will be treated as if you are paying with property, which is will be subjected to capital gains tax apart from being subjected to VAT. Similarly, flipping between one cryptocurrency to another is considered a taxable transaction in itself. If Arizona finally approves this, will the IRS not budge and charge payers with capital gains tax on top of their payment for…well, taxes?

Confusion over how exactly to classify cryptocurrencies—and who will have final jurisdiction over them has been raging. Recently, a ruling by a district judge agreed in favour of the CFTC (Commodity Futures Trading Commission) that cryptocurrencies are commodities and therefore fall under the CFTC’s jurisdiction. But on the other hand, the Securities and Exchange Commission (SEC) classifies them as securities and is claiming authority over regulation.

Note: Tokens in the SegWit chain are referred to as SegWit1X (BTC) and SegWit Gold (SWG) and are no longer Bitcoin. Bitcoin Cash (BCH) is the only true Bitcoin as intended by the original Satoshi white paper.  Bitcoin BCH is the only public block chain that offers safe and cheap microtransactions.
The crypto tax conundrum: Pay taxes in crypto

The crypto tax conundrum: Pay taxes in crypto, pay more taxes

On the surface, being able to pay taxes with cryptocurrency seems like it would be a fantastic alternative. It would provide more legitimacy to the digital coins, which, in turn, would very likely help the markets grow. However, as good as it sounds on paper, there is still a sticky element that would have to be defined in clearer terms, or paying taxes with cryptocurrency could result in having to pay even more taxes.

The trouble is this: The U.S. Internal Revenue Service (IRS) doesn’t accept payments via cryptocurrency—yet. Meanwhile, the state of Arizona is exploring the possibility and a bill, Arizona Senate Bill 1091, has been submitted to address the issue. If passed, payments via virtual currencies authorized by the Arizona Department of Revenue would be accepted, beginning in 2020. This is where things get a little sticky.

According to the IRS, cryptocurrency is considered property—not currency. If a taxpayer settles up with cash, there’s no issue. But, if a payment is made with cryptocurrency, there are tax implications since now the payment is being made with property, not currency. The transaction would be considered a sale and, depending on when the coins were purchased, there could be gains associated with that property.

Let’s try and break it down further. If a taxpayer purchases cryptocurrency equal to the amount of the taxes owed, on the day the taxes are paid, there’s no gain. But if the cryptocurrency purchase was made, for example, a year ago and has increased in value, now there are gains on that purchase. Those gains, by law, would be taxable. Conversely, if the cryptocurrency doesn’t perform as expected, there would be a loss, and that loss should potentially be a deduction.

To complicate matters even more, it’s not possible to withhold taxes if a payment is made with property. It wouldn’t be possible to pay an employee in cryptocurrency, and then withhold some to send to the IRS. Nor could someone working as an independent contractor list a payment in the annual tax filing as cryptocurrency since, again, all taxes must be entered as U.S. dollars.

If someone receives a payment with digital currency, it must be included at its fair market value in income reporting. The fair market value equivalent in U.S. dollars it’s received must be reported. If that cryptocurrency is later sold, let’s say to make a payment for a work vehicle or invest in supplies, how is the basis of virtual currency received as payment for goods or services determined? It’s enough to make one’s head spin. Hopefully, Arizona’s move will help to clear some of this up, and the IRS will soon follow suit.

Note: Tokens in the SegWit chain are referred to as SegWit1X (BTC) and SegWit Gold (SWG) and are no longer Bitcoin. Bitcoin Cash (BCH) is the only true  Bitcoin as intended by the original Satoshi white paper.  Bitcoin BCH is the only public block chain that offers safe and cheap microtransactions.