Key Insights:
- Trump’s re-election reignites the debate on whether cryptocurrencies should be taxed as capital assets or currencies.
- Proposed elimination of capital gains tax on Bitcoin could reduce public service funding but boost investment.
- Tax exemption for cryptocurrencies may favor the wealthy, potentially widening the wealth gap.
Cryptocurrency tax reforms is a debate making airwaves in the U.S following Trump’s election. These reforms could change the classification of crypto from capital assets to currencies. Despite promoting investment, these reforms may hugely benefit wealthy investors thus increasing economic inequality.
Capital Gains For Cryptocurrency Taxation Under Review
Recently, the taxation of Bitcoin and other cryptocurrencies has become a topic of discussion following Trump’s re-election for a second term as U.S president. Initially, Capital gains tax was applied to profits on cryptocurrency transactions. However, there is a growing debate on whether digital assets should be considered as currencies which would exempt them from capital gains taxes.
According to Internal Revenue Code (IRC) section 988, profits from foreign exchange transactions are taxed as ordinary income not as capital gains. Thus, if cryptocurrencies are categorized as foreign currencies, they would be taxed at relatively higher ordinary income tax rates rather than the maximum 20% for long term capital gains.
Proposed Tax Changes and Their Effects
Trump has proposed the elimination of capital gains tax on Bitcoin, a move to change the cryptocurrency market for traders and investors. Currently, short term profits from cryptocurrency transactions are taxed as ordinary income rates which can go up to 37%. However, long term capital gains are taxed rates that go up to 20% based on the duration the asset has been held.
These proposed reforms aim to promote growth in the cryptocurrency industry by reducing the tax rates for investors. However, this could have a negative impact on state and public funding which depends on tax revenue to operate effectively.
Economic Considerations of Tax Exemption
The idea that cryptocurrency gains are exempted from tax is an idea that no other asset class has achieved. Municipal bonds are tax-exempt because they are meant to fund public infrastructure projects that serve everyone in the society. However, similar tangible benefits are not provided by cryptocurrencies which are mainly speculative assets.
However, tax exemption on cryptocurrency gains may only benefit high net worth individuals who invest in cryptocurrency assets. This may further create inequalities in income since most of the cryptocurrency assets are held by few crypto enthusiasts and institutional investors.
Re-evaluating Cryptocurrency as a Currency
The idea of classifying cryptocurrencies as conventional currencies for tax purposes is complex since they are highly volatile assets and are not backed by central authorities.
Unlike stable fiat currencies, cryptocurrencies are considered as investments rather than mediums of exchange. The classification of digital assets as currency could lead to higher taxation under income rates rather than provide the intended tax relief.
However, enthusiasts who advocate for reforms in the taxation of cryptocurrency often overlook details that could have major financial implications. The classification of crypto assets as currencies could lead to higher taxation for investors in the industry.