The cryptocurrency community is excited for the launch of Bakkt, the Intercontinental Exchange’s (ICE) crypto venture, which won’t just list physically-settled bitcoin futures contracts, but will also help adoption grow.
Bakkt is set to launch later this year, and while the CEO of the New York Stock Exchange (NYSE) has claimed it’s a “bit of a moonshot bet,” cryptocurrency users are looking forward for the platform. Its CEO, Kelly Loeffler, has stated the firm’s solution will make “buying and selling of bitcoin fully collateralized and pre-funded.”
While DLT and cryptocurrencies are early in their development, we are committed to expanding the use of this technology to promote choice by building a fair, efficient platform for digital assets globally— Bakkt (@Bakkt) January 17, 2019
Being able to pay for coffee or any other good and service with crypto is what a lot of users are looking forward to. According to a report by The Block, coffee giant Starbucks has received equity in Bakkt, and will in return install software on its stores this year to allow patrons to pay using the flagship cryptocurrency, BTC. For cryptocurrency users, the move may turn into a tax-related nightmare.
Currently, the US sees cryptocurrencies as property, and every transaction has to be logged, whether it’s a large or a small one. This means that every time users buy coffee with BTC, they’ll have to record the transaction for tax purposes.
Needless to say, every transaction triggering a “taxable event” will lead to, as senior research fellow at the nonprofit research and advocacy group Coin Center James Foust put it, an “extremely burdensome” situation for tax purposes. Foust added:
You’d need to work out the fair-market value [of a bitcoin] at the time [of a coffee purchase] versus the fair-market value [at tax-filing time], and you’d need to itemize the gains or losses. If you realized 40 cents on the gain, you’d need to pay a few pennies.
In its 2014 guidance, the US Internal Revenue Service (IRS) made its position on cryptocurrencies clear: they’re property, and as such are subject to capital gains taxes. Not paying crypto-related taxes, as CryptoGlobe has reported, can lead to fines up to $250,000.
Despite the difficulties, Starbucks seems set on the idea, and in a press release Starbucks vice president in partnerships and payments noted it will “play a pivotal role in developing practical, trusted and regulated applications for consumers to convert their digital assets into U.S. dollars for use at Starbucks.”
Customers May Not Know the “Real Cost of Compliance”
As Kirk Phillips of the BitcoinCPA argues, tax law shouldn’t discourage innovation, although cryptocurrency users may find themselves in substantial trouble when tax day comes if they don’t properly manage their transactions.
Phillips believes that new users who may just want to pay for their coffee using bitcoin may “not know what the real cost of compliance is.” Nevertheless, he added:
I think the technology has to roll out and move good ideas forward regardless of tax laws that may hinder adoption.
Experts at Coin Center believe there are solutions the government could apply to avoid hindering adoption and cryptocurrency use in general. One of these solutions would be designated cryptocurrencies as foreign currency. This has, per MarketWatch, its own set of considerations, including the “loss of capital-gains treatment for transactions over $200.”
Jerry Brito, Coin Center’s executive director, noted in a 2017 proposal made on the taxation of cryptocurrencies that it would be possible to “remove the friction and encourage the development of this innovative technology and its use in payments.” His solution:
A better option might be to simply create a de minimis exemption for cryptocurrency the way it exists for foreign currency.
While no solution is applied, cryptocurrency users who want to comply with the IRS and avoid the risk of facing fines, will have to keep track of their transactions, as the IRS wants crypto users to report all individual sales ayend trades.
There are, however, tools to support them in doing so.
One of those tools, BitTaxer, is designed for both individuals and CPAs and helps crypto users remain compliant with the IRS’ guidelines. To use it, all they have to do is add transaction data from their records, or upload them from their exchanges, and classify transactions that aren’t buys and sells.
BitTaxer then, on its own, takes care of everything. It calculates gains and losses, and attaches the proper forms that will need to be sent attached to users’ tax returns.