Crypto payments, even for taxes, might come sooner that investors think
As the institutional and regulatory pivot toward more pro-crypto, or at least less anti-crypto, stances and positions continues, there remains one specific area where progress has remained very limited; taxes and tax treatment. While crypto investors and advocates have been able to achieve some success versus the SEC, both in court and in terms of public perception, the IRS has been less open to changes. In all fairness it is the prerogative of the IRS to enforce current tax laws and interpret those laws; it remains up to Congress to change existing tax laws before the IRS can change enforcement mechanisms. That said, the IRS has been active in issuing crypto taxes announcements, responding to frequently asked questions, and making public comments on these topics; conversations that are often helpful but have not resulted to any change in tax treatment.
Building on the momentum that has recently seized Congress in the form of 1) rebuking SAB 121,2) passing FIT21 in the House, and 3) the influence of Crypto SuperPACs, Florida Representative Matthew Gaetz introduced a bill that would allow U.S. taxpayers to pay federal taxes using bitcoin. Two of the major changes that this bill, if passed, would cause are a change to the IRS tax code to allow such a payment option as well as enlisting the US Treasury to develop and implement a system to enable bitcoin tax payments to be processed.
The likelihood of this bill becoming law is low, especially with crypto having become a late addition to the list of major issues for the 2024 Presidential race, but there are a few factors worth taking a look at.
Would Not Be The First In The U.S.
A piece of information that might come as a surprise to some crypto investors is that this proposed legislation is not the first time this has been suggested, but it is not even the first time paying taxes with bitcoin has happened in the U.S. Ohio was the first state to launch a pilot program allowing residents to pay certain state taxes and other fees using bitcoin before postponing the program in 2019 due to technical issues. Following this pilot multiple other states including Colorado and Florida both allowing residents to pay certain taxes and fees using bitcoin.
Regardless of whether or not the legislation proposed by Representative Gaetz moves forward in any material capacity the fact remains that there is, and has been, an appetite on the state level to allow taxpayers to pay certain expenses using bitcoin. Government mandates and incentives however are only a part of the broader crypto story, or the economic appeal of any asset class, and these efforts ignore one fundamental question.
Do bitcoin investors actually want to pay taxes using bitcoin?
Who Would Pay Using Bitcoin
Tax policy aside it is important to remember that the majority of bitcoin does not tend to be traded, despite the retail discussions on social media and recent institutional buying. Even taking into account recent profit taking amid the bull market in 2024 the percentage of bitcoin that has not moved in the last 18-months remains at over 60%. Long-term hodlers are not a new phenomena in the crypto marketplace, btu the fact that such a large percentage remains unmoved despite recent market run-ups is indicative of the apparent low interest of bitcoin investors to spend bitcoin holdings.
In addition to the long-term belief that investors have in these assets, remembering that for many bitcoin is an asset class and investment like any other, the tax treatment and accounting requirements for such transactions represents a significant obstacle. For example, being able to pay federal income taxes using bitcoin is fine, but if every other transaction generates a tax liability, tax reporting obligation, and potential headaches with data collection and preparation this will continue to dissuade the usage of bitcoin as a medium of exchange.
Mainstreaming Crypto Payments Is Good Policy
Since it remains unlikely that any bill that would cause substantive change to U.S. crypto policy will pass into law in the near to medium term the analysis of any one specific piece of proposed legislation might seem like a moot point. That misses the larger importance of these proposed changes, as mainstreaming the idea of crypto payments across the board is a sign of how far the conversation has rapidly moved. Gone are the days of the SEC holding unchallenged sway over the regulatory conversation, facing multiple setbacks and a recent lawsuit filed against it by Coinbase. In its place is an environment where, while still contentious and viewed with suspicion by some lawmakers, crypto and tokenized applications are finally emerging from the shadow cast across the sector by the collapse and criminal activity at FTX.
Crypto payments for taxes and otherwise continue to move from concept to reality; this is good news for crypto and U.S. innovation overall.
