Why The U.S. Tax System Is Preventing Crypto Adoption For Digital Nomads
I’ve worked with a group of about 50 freelancers in the crypto community over the past few years.
They’ve come from all over the world, and most of them have been getting their paychecks in bitcoin, as well as some 10–20 different cryptocurrencies.
The digital nomad lifestyle many of them live is attractive, but it also has its fair share of headaches — especially when it comes to paying taxes.
For example, if I write something for Decred — the autonomous digital currency — then I get paid in Decred (DCR). But that doesn’t necessarily mean I have a good sense of what to do with that payment next.
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Do I liquidate into fiat and pay my rent with it, or do I trade in that Decred for bitcoin on an exchange? And most pressingly, how will that affect my potential tax liability?
At the moment, there aren’t any clear answers to those questions, which is stifling innovation and keeping people from relying on cryptocurrencies in a meaningful way. Instead, people are continuing to use them as a speculative investment.
In order to have widespread adoption of crypto, there needs to be more clarity and simplicity when it comes to tax laws and regulations in the U.S.
Here’s why it’s time to follow the lead of more forward-thinking nations and start figuring out an intelligent way to integrate crypto into our tax system:
If you’re working outside of the U.S. as a citizen, you still owe taxes back to the United States.
Citizens of the U.S., regardless of where they reside and how much time they’ve spent in another country, still owe taxes on crypto capital gains.
That sets up a difficult dynamic for a few different reasons. For one thing, if you’re being paid in crypto, that’s technically your income. However, if the price of your coins fluctuates wildly, and you’ve realized gains when you liquidate, that money will be taxed as capital gains. On top of that, if you’ve held them for less than a year, they’ll be treated as short term capital gains — which are taxed at a higher rate.
Additionally, each transaction (no matter how small) is taxable. Because cryptocurrency is viewed as property by the IRS, it doesn’t enjoy a de minimisexemption — meaning there is no amount small enough to avoid the capital gains tax.
So, every time you get paid in crypto, you have to keep track of your “gains” for tax season.
From a digital nomad’s perspective, this is all ridiculously complex.
Nomads work and live in multiple different countries throughout the year, operating under a bevy of tax jurisdictions. Add to that the difficulty of juggling potentially dozens of cryptocurrencies along with fiat currency, and it’s easy to see what a headache tax time can be.
The crypto tax implications and regulations lack clarity.
This technology is so modern and can do so much to facilitate frictionless transactions, but the lack of clarity around regulations is holding people back from using it.
Even if we make it incredibly easy to use, like tapping an icon or taking a picture of a QR code, the tax and regulatory space will still be complex. Which means work needs to be done not only on building the infrastructure for this technology, but also on making sure people understand and can easily navigate regulations and tax laws.
And people are beginning to work on these issues.
Coinbase recently announced a partnership with TurboTax which will allow users of TurboTax Premier to upload up to 100 cryptocurrency transactions at once. Having a well-known business enter the game on behalf of crypto users is a huge step forward — and it will give people some much-needed help in dealing with their taxes this year. Additionally, Coinbase is integrating with Cointracker, making it easier for users to aggregate all the transactions that they’ll need to upload for tax purposes.
This push to make tax season easier for crypto users has to continue if we want to see widespread adoption.
Because it’s not just about handing someone a crypto wallet or making it easy to exchange currency in a peer-to-peer payment.
It’s about ensuring they can do that without getting hammered by a massive tax bill come April.
This lack of insight is preventing people from working, living and paying in a distributed, decentralized way.
The uncertainty of where Americans stand when it comes to crypto, regulations, and taxes is having a chilling effect on people’s willingness to experiment with the technology.
From a personal standpoint, I’ve been wanting to take a year or so to travel using cryptocurrency. What’s been holding me back is the sense that I don’t really understand the tax implications of that as a U.S. citizen. It’s already fairly complex to work and live abroad for a year when you’re being paid in fiat currency. Throw crypto into the mix and you’ve added a new, overwhelming layer of intricacy.
Five years ago, this wasn’t an issue.
The crypto space was the Wild West and people were living off these currencies because they truly weren’t being traced. Now, Coinbase is required to share all their customers’ details with the U.S. government. And people say your public keys and wallet can’t be attached to your identity, but they can be. It’s not the same environment as it was just a few years ago.
On the bright side, we’re seeing infrastructure like the Lightning Network begin to take shape. Crypto holders will be able to have close to zero fee transfers and payments that can be accomplished quickly and easily.
What we still need is clarity around regulations and tax laws and tools to easily track and manage tax burdens. Otherwise, we’ll never see the mentality around cryptocurrencies change from “I’m just buying this to speculate,” to “I’m using this to pay my bills because it’s simple and I trust its value.”
Thanks for reading!