BRIAN DARLING
1/04/2019

Tax and regulatory reform for alternative currencies is an idea whose time has come.

President Donald Trump, a disruptive to the status quo politician, should embrace tax and regulatory reform for cryptocurrency. Cryptocurrency, also known as digital currency and held as digital assets, is an innovative threat to traditional banking, the Federal Reserve System and fiat currency. In his first two years, the president slashed economy killing regulations and cut taxes in a way that has helped produce historically low unemployment rates and strong economic growth. Cryptocurrency is in need of targeted regulatory reform and tax changes to make America crypto-friendly.

Investors understand that the sometimes-volatile market for cryptocurrency is the future of how humans will transfer value from one person to another. CNBC reported on December 21 that Coinbase, “the leading U.S.-based cryptocurrency exchange, recently raised $300 million at a valuation of $8 billion.” CEO Brian Armstrong’s stake in the company is worth a reported $1.3 billion, according to Forbes.

Many are flocking to this innovative technology because they recognize that this efficient means of the transfer of value from one to another is the future way that people will pay for goods and services. That is why the entrepreneurs who are on the cutting edge of pushing out the technology are getting rich. This groundbreaking technology has the potential to be a big driver of future economic growth in the United States if not sabotaged by ill-conceived government policies.

Right now, the U.S. government has engaged in tax and regulatory policies that have American digital currency entrepreneurs fleeing the U.S. to avoid overtaxation and a likely future regulatory morass.

A Cryptocurrency Boom?

There are a handful of members of Congress who are taking the threat seriously and trying to make America friendly for cryptocurrency use. If tech-friendly members of Congress can change law and policy to create an inviting environment for disruptive alternative currencies, the U.S. economy will experience a massive economic boom.

For those not familiar, a cryptocurrency is an alternative form of currency from the traditional dollar. When held, it is a digital asset that uses peer-to-peer networks that create a blockchain ledger as a means to create a decentralized way to transfer value and record transactions. This digital asset has no intrinsic value, yet it has created a trustworthy system that many use as an alternative to traditional cash.

Digital currency and exchange that allow the transfer of these currencies are useful alternatives to traditional banking and the paper money system we have relied on for generations. This is a disruptive technology that the status quo hates. That’s why the federal government has not taken actions to embrace it.

Market Mayhem

The problems for the U.S. in cryptocurrency are twofold and fall into the two areas where the federal government can create the most mayhem in markets: regulation and taxation.

First, are the regulatory issues. Many entrepreneurs are worried that the federal government will impose a regulatory scheme for the use and transfer of these digital assets in a way that will make it not worth a company’s effort to stay in the U.S.

A dangerous sign is that the Securities and Exchange Commission (SEC) has resisted efforts of Bitcoin holders to set up an Exchange Traded Fund (ETF) that would allow a fund to collect digital coins and be traded like other securities. The SEC does not want to give an inch to allow the camel’s nose under the tent, to in any way give a government stamp of approval for cryptocurrency.

Second, the Trump tax plan imposed a statutory tax on common transfers of cryptocurrency in a way that will push them all overseas. Right now, some swap digital coins (or tokens) for other coins (or tokens) in a way that should not have any tax implications for those involved in the transactions. Tax law forces a taxable event every time a person or company uses one digital currency to purchase another digital currency, by logging it as a capital gain.

Tax Surprises

Because of that bizarre new law, the holders of digital assets will be hammered with unexpected and big tax bills in April. Expect the result to be that the best and brightest in the industry flee overseas and for the American economy to take a big hit.

Rep. Ted Budd, R-N.C., recognized the problem and has drafted legislation to exempt these transactions from crushing taxation. The bill, H.R. 7361, would create a special rule: “the exchange of virtual currency for virtual currency of like kind shall be treated in the same manner as the exchange of real property for real property of like kind.” Translated from tax law to English, this legislation would exclude gains or losses so that a person would not have to deal with the IRS every time they use a digital currency to purchase another digital currency. Rep. Budd clearly understands how a small tax provision could lead to billions in capital flight overseas.

It is time for the federal government to embrace, not punish, emerging technologies like cryptocurrencies. Thankfully some in Congress are taking actions to protect job-creating entrepreneurs from the harm federal regulators and tax collectors could do to all those who have embraced the idea of an alternative to traditional currency.

Darling is a former staffer for Sen. Rand Paul, R-Ky., and president of Liberty Government Affairs.

See original piece here.