Cryptocurrency Taxation May Be A Significant Disadvantage Of Mainstream Adoption


One of the biggest dreams of the cryptocurrency enthusiast has been for the industry to achieve mainstream adoption. Unfortunately, the reality of how difficult it would be to use bitcoin as a day-to-day medium of exchange makes this dream farfetched. Now, things like tax regulations and cryptocurrency utility also threaten mainstream adoption. Long-term, the outlook of the cryptocurrency market is positive as long as the regulatory framework is adjusted to accommodate this new method of payment.

Mainstream Adoption Of Cryptocurrencies And Cryptocurrency Taxation

Superficially, adopting cryptocurrency large scale appears simple. However, when you consider the current regulatory state of the industry, you’ll find out that it is more complicated than it appears. Things like simple cryptocurrency investments become complicated with cryptocurrency tax laws. The issue of classification hasn’t been cleared. This is part of what the IRS mentioned under IRC Code Section 1031.

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For example, each time you sell property or do cryptocurrency business, you are required to pay tax on the gain. If you intend to reinvest the gain, the IRS allows you to postpone paying taxes. If the cryptocurrency market is regulated this way, investors will need to pay taxes only when they want to convert their cryptocurrencies to fiat. Buying cryptocurrencies will not be taxable. Depending on the USD amount that was originally invested, taxation will be incurred during sales of cryptocurrency assets.

According to Cross Law Group, this like-kind model may not be applicable with the current regulatory framework. The qualifications of cryptocurrency-to-cryptocurrency trades as like-kind exchanges is uncertain. Even if it is implemented, it may not be the best solution. They look simple short-term but the problem might arise when people try to sell their cryptocurrencies for fiat. Recording and tracking these events will not be easy. This is especially because the market is still extremely volatile. Imagine a hypothetical situation were a user buys Litecoin for $30 and the price goes up by $10 in two days. If the user buys 133 tokens using that amount at a rate of $0.30 per token, he or she would ignite taxable event buying 0x with litecoin.

If the user above had performed this transaction on Coinbase, it would be easy to get accurate records of each trade. However, not every exchange records details of trades. Don’t forget that users of cold cryptocurrency exchanges can swap assets anytime they choose. This is yet another complication.

Then again, to buy most of the available cryptocurrencies in the market, a user may need to buy bitcoin first using fiat and then use the BTC to buy the desired cryptocurrency. For taxation purpose, the said user will have to record all the prices and data collected during the process from start to finish.

Another complication of cryptocurrency taxation arises when users intend to buy products with BTC or any other cryptocurrency. Users will need to account for all gains and losses from the point of purchase to end of the transaction to get the ideal tax amount. A single purchase is complicated so you can imagine how complicated multiple or large scale purchases will be. If the mainstream dream is to be realized, the current regulatory framework must be adjusted to fit the industry.


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