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New bill would change tax rules for cryptocurrency purchases

A group of lawmakers teamed up Thursday to introduce bipartisan legislation that aims to create a workable structure for taxing purchases made with cryptocurrency.

The bill, dubbed the Virtual Currency Tax Fairness Act, was introduced by Rep. Suzan DelBene, D-Washington, and David Schweikert, R-Arizona, and is cosponsored by Rep. Darren Soto, D-Florida, and Tom Emmer, R-Minnesota. The legislation would exempt personal transactions made with virtual currency when the gains are $200 or less.

The bill’s introduction comes at a time when many taxpayers are struggling to account for their cryptocurrency transactions at tax time, with a line at the top of the Form 1040 asking them if at any time of the year they received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency. The IRS has also made it more of a priority in recent years to pursue holders of cryptocurrency such as bitcoin for tax evasion, issuing John Doe summonses to popular cryptocurrency exchanges like Coinbase and Kraken asking for the identities of their users.

Currently, any gains from virtual currency have to be reported as taxable income regardless of the size or purpose of the transaction, even if it’s just to buy a cup of coffee. Individuals are required to calculate and report any changes in the currency’s value against the U.S. dollar from the time they purchased the currency until it is used in a transaction, making the everyday use of virtual currency more difficult.

“Antiquated regulations around virtual currency do not take into account its potential for use in our daily lives, instead treating it more like a stock or ETF,” DelBene said in a statement Thursday. “However, virtual currency has evolved rapidly in the past few years, with more opportunities to use it in our everyday lives. The U.S. must stay on top of these changes and ensure that our Tax Code evolves with our use of virtual currency. This commonsense bill cuts the red tape and opens the door to further innovations, ultimately growing our digital economy.”

The use of digital currencies has grown in popularity, even though the values of some popular cryptocurrencies have experienced steep declines in recent months.

An example of complexity

Separately, a cryptocurrency investor is challenging the IRS on its stance, refusing a tax refund after a dispute over so-called “staking rewards,” a way of earning passive income from cryptocurrency that’s offered as an incentive to participants. The case could indicate a change in the way the IRS may look at such transactions. The case involves Tezos, a form of blockchain technology that uses the cryptocurrency Tez, and uses a technology called “baking” to sign and publish blocks on the tezos blockchain.

Joshua Jarrett, a Tezos “baker,” sued the federal government in 2020 over the taxation of the staking rewards, arguing the IRS had improperly classified them as income instead of created property, which is taxed at the point of sale, not creation.

Jarrett announced Thursday that the IRS had recently offered him a refund on the taxes he had paid on the staking rewards, which could signal a possible change in policy for the IRS. But he wants the IRS to clarify its stance and issue a definitive ruling.

“[In] December 2021 I received a letter saying the government wanted to grant me a refund — in other words, a year and a half into this process, the government didn’t want to defend the position that the tokens I created through staking were taxable income,” Jarrett said in a statement Thursday. “At first glance, this seemed like great news. But until the case receives an official ruling from a court, there will be nothing to prevent the IRS from challenging me again on this issue. I need a better answer. So I refused the government’s offer to pay me a refund.”


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