On June 25, North Carolina Rep. Ted Budd (R) reintroduced the Virtual Value Tax Fix Act (H.R.3963) to the U.S. House of Representatives Ways & Means Committee. The bill amends portions of the Internal Revenue Code of 1986 to include a special provision for cryptocurrency transactions. Under the current rules, a consumer who makes a purchase with cryptocurency is subject to a “double tax” (sales tax and capital gains tax) of as much as 40% of the transaction.
The new bill would amend Section 1031 of the tax code with a short section titled “Special Rule for Virtual Currency” that changes the classification of these transactions. Current IRS rules treat cryptocurrencies as assets — the same category as stocks and bonds — and trigger a “taxable event” when traded or exchanged. Under the proposed changes, “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.”
As Rep. Budd stated when testifying on the topic to the Ways & Means Committee on June 4, “The use of digital assets is already treated as a sale of the asset, even though the economic reality of the transaction is a purchase of a simple consumer good.” As Budd explained to the committee, “For instance, a consumer using bitcoin to buy a flatscreen TV set faces double taxation. First, a sales tax on the purchase, and second a capital gain on the bitcoin used in the purchase.”
Budd further illustrated the flaws in the current rules with another example. “If a [cryptocurrency] user spends sixty-five cents worth of bitcoin to buy soda from a vending machine, he is required by law to calculate and pay the tax liability associated with that transaction. This is not a sustainable model, in my opinion”
This is the second attempt to introduce a common-sense fix to the IRS rules regarding cryptocurrency use. The first version, the Cryptocurrency Tax Fairness Act, was introduced in the 2018 Congressional session by former Rep. Jared Polis (D-CO). That effort ultimately failed to gain momentum during last year’s session, and Polis has since left Congress to serve as Governor of Colorado. Budd was a co-sponsor of the previous bill.