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Tax, Tokens And The Blockchain – H.R. 2144 of 116th Congress



Annette Nellen - Blockchain

Introduced on April 9 2019, the Token Taxonomy Act of 2019 (H.R. 2144) would “amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude digital tokens from the definition of a security, to direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography, to adjust taxation of virtual currencies held in individual retirement accounts, to create a tax exemption for exchanges of one virtual currency for another, to create a de minimis exemption from taxation for gains realized from the sale or exchange of virtual currency for other than cash, and for other purposes.”

The proposed di minimis exemption is worded as follows:

SEC. 139G. GAIN FROM SALE OR EXCHANGE OF VIRTUAL CURRENCY.

“(a) In General.—Gross income shall not include gain from the sale or exchange of virtual currency (as defined under section 408(m)) for other than cash or cash equivalents.

“(b) Limitation.—

“(1) IN GENERAL.—The amount of gain excluded from gross income under subsection (a) with respect to a sale or exchange of virtual currency shall not exceed $600.

“(2) AGGREGATION RULE.—For purposes of this subsection, all sales or exchanges which are part of the same transaction (or a series of related transactions) shall be treated as one sale or exchange.

“(c) Inflation Adjustment.—In the case of any taxable year beginning in a calendar year after 2018, the dollar amount in subsection (b) shall be increased by an amount equal to—

“(1) such dollar amount, multiplied by

“(2) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2017’ for ‘calendar year 2016’ in subparagraph (a)(ii) thereof.

Any increase determined under the preceding sentence shall be rounded to the nearest multiple of $50.”

Sec. 10(c) of H.R. 2144 provides:

“Reporting Of Gains Or Losses.—The Secretary of the Treasury shall issue regulations providing for information returns on transactions in virtual currency (as defined under section 408(m)) for which gain or loss is recognized.”

Proposed new §408(m) defines virtual currency as: “For purposes of this subsection, the term ‘virtual currency’ means a digital representation of value that is used as a medium of exchange and is not currency (within the meaning of section 988).”

Also see sponsor Rep. Davidson’s press release of 4/9/19 on the proposal.  It addresses the token and blockchain aspects of the proposal but not its tax proposals.

Observations/Queries: How broad are the reporting regulations intended to be? More should be specified in the bill.  For example, are the sponsors aiming to be sure exchanges that exchange virtual currency for other virtual currency or U.S. dollars issue a reporting form?  Or is this broader and any merchant would be issuing a report that it received virtual currency and the value it assigned to it (generally, the selling price of the goods or services exchanged)? Also, how broad should a $600 exclusion for gain from transactions be applied?  After all, $100 of bitcoin in 2010, was worth about $4.3 million in fall 2017.  And it is still worth a lot today.  The exclusion would incentivize these holders to only purchase goods and services from merchants who take bitcoin and to never spend more than $600 at a time. This would enable them to exclude the gain although it might take a long time to fully exclude the gain on that $100 cost basis of bitcoin. A policy goal of an exclusion is to simplify tax reporting by not having to figure out the gain or loss when virtual currency is used to buy low-value items.  The foreign currency exclusion at Section 988(e) is $200. Why not use that same amount for virtual currency? Also, consideration should be given to not allowing the exclusion for bitcoin acquired before a specified date due to the tremendous inherent gain that exists in it that arguably defeats the policy reason for a de minimis reporting rule. Also, I suspect including all of this highly appreciated virtual currency will make this bill cost too much and possibly not get enacted, when it can provide a helpful benefit to avoid tracking small gains and losses that might many times be less than $5.

For more on virtual currency and blockchain, please visit my website on these topics

Have a question? Contact Annette Nellen.

 

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Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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