The tax treatment of cryptocurrencies has been a persnickety affair. Long gone are the days when bitcoin users mistakenly believed that their experiment in monetary innovation would be free from the grabbing hands of the state. But cryptocurrencies’ unique properties and uses posed a dilemma for tax authorities seeking to outline a reasonable path for taxation of technologies like bitcoin. Thankfully, a new bill could rectify many of the early mistakes made with the tax treatment of cryptocurrencies.
The tax problem was not an immediately straightforward one to the policymakers looking to address it in the post-2013 bubble haze. Underscoring just how novel bitcoin was to the federal government, a 2013 Government Accountability Office report recommending that the IRS take action on cryptocurrencies was mostly informed by the tax agency’s previous stance on virtual and game world currencies like those in World of Warcraft and Second Life. The concept of a totally distributed, censorship-resistant virtual currency understandably exceeded the boundaries of what policymakers had considered thus far.
Adding to the mystification were the myriad applications of blockchain technology. Cryptocurrencies were simultaneously used by different people as a kind of transaction platform, standard currency, investment vehicle, or even a complex financial instrument. It was difficult for policymakers to review this developing landscape and determine which of the many alternative tax options would be most appropriate for the new technology. Andrea O’Sullivan explains the bad decisions the IRS made, why it didn’t have much choice, and how the problems can be fixed.
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