Bitcoin’s potential to thrive as a medium of exchange has been unnecessarily hindered by its current tax treatment in the U.S. Introducing a de minimis exemption could help address this issue.

With a new administration coming into office next month, and a slew of Bitcoin-related policy proposals on the table for Day One, it is an exciting time for Bitcoiners of all stripes.

Along with analysis and education on the fundamentals of a Strategic Bitcoin Reserve for the United States, it is also important to hone in on how to improve public policy for those who are already using bitcoin as the future of money.

To do so de jure rather than de facto, however, will also mean removing the barriers that prohibit Bitcoiners from using it as a medium of exchange. This is where de minimis exemption comes into play.

How the tax agents view Bitcoin

As I’ve mentioned previously, various agencies of the federal government already have a lexicon and regulatory framework they’ve assigned to Bitcoin. Most important here is our tax collection authority.

The IRS deems bitcoin – along with every other convertible virtual currency I normally call the “crypto-offspring” of Satoshi’s innovation – to be property. 

Though bitcoin is, according to the IRS, a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value,” it is treated for tax purposes as a normal capital asset assessed as either being held short-term or long-term, thereby changing the capital gains tax.

“If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency,” quotes IRS Notice 2014–21.

Effectively, this means that when you use your bitcoin to exchange for a product or service you receive, this is a taxable event. Whatever equivalent USD price you acquired that bitcoin for will be measured against the current market value of the good or service you consumed.

Bitcoin’s path to medium of exchange in law

What I’ve described above is the status quo according to the Internal Revenue Code. In practice, for anyone who uses bitcoin to buy and sell things, this is incredibly cumbersome, complicated, and no doubt requires expensive software or accountants to assess a final tax bill.

But if we seek to make bitcoin the future of money, it will require changing how our government classifies it. Or at least classifies the transactions that we make with it.

The risk of igniting a rhetorical firestorm with monetary economists on the debate of whether  bitcoin is money is not our aim here.

Rather, it’s a look at what current logistical and regulatory barriers exist to making bitcoin a more “useful” medium of exchange.

Practically, that means introducing a De Minimis Exemption for bitcoin and its crypto-offspring in the Internal Revenue Code.

The De Minimis Exemption for Bitcoin

In modern times, hassling over de minimis exemptions relates to tariffs and trade. The Biden Administration, for example, issued an executive order recently to try to rollback the de minimis exemption on imports from foreign nations like China. 

Existing law allows importers to be eligible for the de minimis exemption if the “aggregate fair retail value of the articles imported is $800 or less”. This is a good starting point. The same applies to foreign currency exchanges if a gain is under $200.

Right now, every transfer of bitcoin is considered a taxable event with no de minimis exemption.

But for anyone already living on a bitcoin standard, ordinary purchases should not be itemized declarations you make to the IRS. Paying rent should not be a taxable event, neither should picking up the dinner tab, buying a new couch, or paying the plumber to fix your broken kitchen sink.

That means that there should be some legislative fix to codify a de minimis exemption for any purchases executed using bitcoin.

Coin Center Executive Director Jerry Brito has suggested such a path since at least 2017, and for good reason, as well as the good folks at Cato Institute.

In Congress, various bills have been introduced to address this, beginning with the Cryptocurrency Tax Fairness Act in 2017, brought to the floor by then-Rep. Jared Polis (now Democratic governor of Colorado) and Rep. David Schweikert (R-AZ). 

More bipartisan efforts were made with the Virtual Currency Tax Fairness Act, introduced in some form every legislative session since then, and most recently by Sens. Ted Budd (R-NC), Kyrsten Sinema (I-AZ), and Kirsten Gillibrand (D-NY) in early 2024.

These legislative attempts at codifying a de minimis exemption for virtual currency exchange were set low: between just $200 and $600. While this is laudable as an effort for congressional representatives, any one who wants to use bitcoin as a true medium of exchange knows this is far too low.

For that purpose, the amount of $200 is an absolute floor for those of us who use bitcoin to pay for things we use, eat, or service. Ideally, this amount should be $10,000. Or, if we’re more faithful to the projection of bitcoin as a true medium of exchange, something like $250,000.

We know more people will demand to take their salaries in bitcoin, as several football players and even the mayor of New York City have done. Should those who elect to be remunerated in bitcoin have accountants on call when they go to lunch or buy socks? We know this cannot continue.

The political winds against this may be strong for the moment, but it is incumbent on advocates to continue to push for all use cases of bitcoin, whether for saving or spending.

For now, de minimis exemptions on ordinary bitcoin transactions are a path to modernizing the government’s approach. Many other changes will need to be necessary, least of which is reform of the Bank Secrecy Act. That’s clear.

In the long-term, though, if we believe the United States will rise to the occasion of recognizing bitcoin as a strategically important asset through an SBR or any other related effort, it also means our country should recognize bitcoin as much more than just digital property or a store of value. It should appropriately be viewed as the future of money.

This article was published at the Bitcoin Policy Institute (archive #1, #2).