Cryptocurrencies involve cutting-edge technology, but Congress is aiming at age-old problems when it comes to financial technology legislation: taxation, crime and jurisdiction to set the rules.
A review of the latest fintech-related bills by CQ Roll Call shows lawmakers’ latest efforts are focused on fostering innovation by some and making sure the technology isn’t abused by others.
A bipartisan bill introduced in January, for example, would remove the tax implications each time cryptocurrency is used to make a purchase. The bill would exempt transactions of no more than $200 from current tax rules.
The IRS now requires taxpayers to report with their annual income tax whether they have profited by buying a cryptocurrency and then used the cryptocurrency to buy goods priced in a fiat currency. The profit would be treated like a capital gain.
Its sponsors, Rep. Suzan DelBene, D-Wash., and David Schweikert, R-Ariz., said in a statement that the existing tax code “makes the everyday use of virtual currency near impossible.” That’s because cryptocurrency used to make a purchase generates a taxable event — based on the difference between its value when it was acquired and the value when spent.
Their bill would treat crypto purchases the same way as small foreign currency transactions, which have the $200 exemption. The legislation would also require the IRS to issue regulations for reporting transactions above that amount. Schweikert offered similar legislation in the past, but the bill did not advance.
The Blockchain Association, a trade group, strongly supports the bill. Without changes, the existing tax code could deter use of cryptocurrencies, Executive Director Kristin Smith told CQ Roll Call.
But she noted that the bill has not been “scored” by the Congressional Budget Office for the cost to taxpayers. That alone doesn’t kill the bill, but lawmakers in the past have objected to voting on some measures without these scores.
The taxation issue could become prominent if cryptocurrency use increases. Companies that facilitate bitcoin payments — called merchant services providers, like BitPay Inc. — received $158 billion in bitcoin last year, which was just about 1 percent of the economic activity on bitcoin’s blockchain, according to Chainalysis, which analyses such transactions. That means the vast majority of holders of bitcoin prefer to keep it than spend it.
Overstock.com Inc. is one of the few large retailers accepting bitcoin. The company told regulators that it held cryptocurrency assets of just $2.3 million at June 30, 2019. That pales when compared with the company’s quarterly revenue of $373.7 million at that time.
Regardless, the IRS is beginning to crack down on reporting. Its Form 1040 schedule for deductions and adjustments, for the first time, asks taxpayers “at any time during 2019, if they received, sold, sent, exchanged, or otherwise acquired any financial interest in virtual currency.”
The agency sent letters to more than 10,000 taxpayers in July telling them to correct prior tax filings due to virtual currency transactions, and the agency provided additional guidance on cryptocurrencies in October.
This guidance does not go far enough, according to eight members of Congress who sent a letter to the IRS in December. They want more from the agency on retirement accounts with crypto assets, interest paid on crypto deposits, and crypto futures products.
The Digital Chamber of Commerce, which represents many of the industry’s biggest players, also wants more from the IRS on how to report crypto transactions, especially in light of that new question on its forms, its chief policy officer, Amy Davine Kim, told CQ Roll Call.
Other lawmakers are moving to settle lingering jurisdictional issues by establishing which digital assets will be deemed securities, which ones will be deemed commodities and how stablecoins, which are linked to more traditional assets, should be regulated.
A draft bill from Rep. Paul Gosar, R-Ariz., would answer some of these questions. Any debt, equity or derivative that relies on a distributed ledger, such as blockchain, would fall under Securities and Exchange Commission jurisdiction only, according to a draft.
Gosar’s staff confirmed to CQ Roll Call that he is working on a final version, which may be introduced within weeks.
His bill would also resolve what regulators worldwide say is uncertainty for digital coins backed not by fiat currency but by assets. Under the Gosar draft, the SEC would have authority over all stablecoins. Gosar is not a member of the relevant committees overseeing these financial agencies.
The marketplace would benefit from a clear distinction between the SEC and the Commodity Futures Trading Commission, according to Clark Fonda, co-founder of the U.S. Blockchain Advocacy Partners, a trade association whose advisory committee is chaired by former Sen. Mark S. Kirk, R-Ill. He described the current regulatory environment as the “Wild West.”
In Fonda’s view, the best-case situation is for policymakers to “choose a lane,” he told CQ Roll Call. He said his sense is that Republicans in Congress probably prefer the CFTC over Gosar’s choice of the SEC.
For change to happen, though, relevant committee leaders of both parties will have to get behind legislation in the Senate and the House, he said. That could be an issue in a year in which Congress is distracted by an impeachment trial, appropriations matters and a national election.
The House already passed two bills designed to study the use of virtual currency by criminals and terrorists. One measure calls for the Homeland Security Department to provide a threat assessment of such use.
Another bill would establish a task force to report each year on the use of virtual currencies by terrorists. It would also offer rewards for those providing the government with information used to convict criminals involved with virtual currencies.
Those bills’ fate is unclear in the Senate.
Correction 10:38 a.m. | An earlier version of this story misspelled Kristin Smith’s name.