Cook it low and cook it slow: My family’s not-so-secret method to cooking short ribs means that long before those short ribs are even close to being done, the kitchen smells awfully good and the mouths are awfully hungry. And so it is with the legislative push to move blockchain forward: Just like no one in my house wants food poisoning, no one wants a half-baked bill on virtual currency.
The second iteration of the Token Taxonomy Act, released on April 9 and hereinafter referred colloquially as “2.0,” is Congress’ latest product aimed at recognizing and defining a new asset class derived from blockchain technology. This past December, Congressional Reps. Warren Davidson (R-Ohio) and Darren Soto (D-Fla.) released the text of the first Token Taxonomy Act. The initial run of this bipartisan bill never left committee and did not make it to the floor for a vote. The bipartisan team has since released this new and improved 2.0 version of the Act, which can best be described as an evolutionary, rather than revolutionary, piece of legislation. In other words, when it comes to figuring out how to handle cryptocurrencies, Congress is cooking low and cooking slow.
Although the key provisions that I think will appeal to the majority of the Accounting Today readership have not changed at all, the significant changes that did make it to 2.0 give us a good look into Congress’ support for a technological transformation that continues to develop without regard to the price of Bitcoin or other headline virtual currencies.
Bloomberg News
Token Taxonomy 2.0: Significant changes
By far the most significant change in the 2.0 version is the addition of federal pre-emption language. The pre-emption effectively removes the rights of the states to regulate digital tokens, particularly as related to securities registration. What Token Taxonomy Act 2.0 does do, however, is preserve the right of the states to enforce their own laws to prosecute “fraud or deceit or unlawful conduct . . . in connection with digital tokens . . .”
Honorable mention for significant changes goes to a new “Rule of Construction,” which expressly provides that nothing in 2.0 should be construed as limiting the applicability of either the Commodity Exchange Act — and thus, the authority of the CFTC — or the Federal Trade Commission Act—thus, the authority of the FTC. This is a perfectly reasonable add. Much of 2.0 and its predecessor version of the Act focused on defining digital tokens and when such tokens should not be treated as securities. If not securities, the jurisdiction of the CFTC and the FTC may be implicated, though 2.0 ensures that their jurisdiction does not have any inadvertent pre-emptions.
For the accounting and tax practitioners who work with virtual currency users and issuers, these two significant changes likely will have limited effect on day-to-day operations. It is the implication of these changes that are more important. These changes represent Congressional direction, and recognition of the importance of light-touch guidance to improve the proliferation of transformative technology.
Tax changes in the Taxonomy Act
The new version of the Act left the taxation sections largely unchanged. Because version 1.0 did not make it out of committee, however, the changes that it and 2.0 propose did not receive significant focus from the practitioner community. So, as a refresher—or perhaps for the first time—the three significant tax-related legislative changes are:
- Modification of the definitions contained in the Individual Retirement Account rules of IRC Section 408, providing that “virtual currency” (i.e., per 2.0, “a digital representation of value that is used as a medium of exchange, and which is not currency within the meaning of IRC Section 988), should be treated similarly as bullion. In doing so, the purchase of a virtual currency from an IRA would not trigger a taxable distribution. In other words, a virtual coin would not be treated the same as a collectible coin like a double-eagle silver dollar.
- Reinstatement of IRC Section 1031 like-kind exchange treatment for the exchange of one virtual currency for another.
- Elimination from taxation for gains on the sale or exchange of virtual currency $600 or less in value.
Although the new bill does not present a large quantity of taxation provisions, the ideas presented are pragmatic: They are directed toward a more meaningful public adoption of virtual currencies. Each of the three provisions allow for transactions to occur without current taxability. That alone is a significant policy direction.
Embedded in the taxation provisions of both versions of the Act are effective dates that are retroactive to January 1, 2017. It was a curious provision in the original Act; it’s even more curious that it survived.
Considering the trend of the cryptocurrency markets, many taxpayers experienced significant gains during 2017, and had realization and recognition events for US tax purposes when converting between alternative virtual currencies and Bitcoin or Ethereum. On 2017 tax returns, which would have been filed during 2018, many of those taxpayers reported taxable gains and paid tax accordingly. With retroactive effective dates in version 2.0, it is possible that many taxpayers who realized gains in those situations may actually have qualified for like-kind exchange treatment under the modified version of IRC Section 1031 proposed in 2.0. As such, these taxpayers may have refund opportunities under 2.0. This would be a very clear expression of Congressional intent to take a favorable stance towards virtual currencies.
On to the de minimis provision: could you buy a cup of coffee with Bitcoin? It will certainly get easier with this provision, which allows for up to $600 of virtual currency to be sold at a gain without a tax consequence. Under the current guidance of Notice 2014-21, one could not purchase a cup of coffee with Bitcoin without triggering a taxable gain. By creating a practical issue of tracking staggering volumes of gains and losses on virtual currency microtransactions, Notice 2014-21 contributes directly to the inability to achieve any sort of widespread adoption for virtual currency. In this regard, both the original Act and Act 2.0 represent a huge step forward.
Conclusion: Worth the Wait?
Those short ribs always vanish before my eyes at the dinner table, yet the complaints still ring in my ears about how we should have eaten an hour ago. I know it was worth the wait. Low and slow. But was Token Taxonomy 2.0 worth the wait? By now, the legislation has had quite a bit of cooking time, and the new changes only add to the flavor. The direction provides a clear signal that Congress wants to take a light-touch approach as the technology develops. The tax provisions provide clear steps toward mass adoption.
So, to answer the question: Was Token Taxonomy Act 2.0 worth the wait? I think it’s safe to say that the answer is “yes!”
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