Crypto needs a de minimis exemption for buying coffee, sure, but maybe more importantly for transaction fees

Today the Virtual Currency Tax Fairness Act was reintroduced in Congress. This is a bill that we helped draft and get introduced last Congress, and I’m glad that after much work it’s back, it’s improved, and it has bipartisan support.

The bill would create a de minimis exemption for personal cryptocurrency transactions that result in gains under $200. This would match how we treat foreign currencies.

The way the problem for crypto is typically framed is that if last week you bought a bitcoin for $8,000 and today, when bitcoin is trading for around $8,800, you used some of it to buy an $3 cup of coffee, then you have experienced about 25¢ of capital gains and you are technically on the hook for keeping a record of that, reporting it to the IRS, and paying tax on it.

That much pointless friction, the story goes, would render crypto not very useful for retail payments, or create a vast class of technically non-compliant taxpayers. That’s absolutely true, but there’s another reason why I think it’s so important to fix this nonsense corner-case of the law.

Continuous disposition of very small amounts of crypto is integral to crypto itself. I’m of course talking about transaction fees or gas. Every time you move some crypto, or run a smart contract, you are probably spending a few pennies on fees to validators, and technically those are all taxable events subject to capital gains tax.

People may not be buying coffee with bitcoin today, but they sure are buying space in blocks with it.

For crypto users, it’s like the world before Congress created the foreign currency exemption: almost everyone who used foreign currency on vacation was technically noncompliant. Having laws on the books that no one follows does not inspire much respect for the law. It also creates a pretext for enforcement that applies to an entire class of people—in this case crypto users. Congress fixed it for foreign currencies in 1997 and it should do the same thing for crypto today.