Over the past few years, the use of Bitcoin for payments has taken a backseat to the increased focus on the digital asset’s use as a store of value. However, the payments use case is now making a comeback thanks to the development of the Lightning Network, which is a secondary protocol layer that enables cheaper, instant transfers for Bitcoin users.
Apps like Bitrefill and Fold, which both help people spend their Bitcoin at major retailers, have integrated the Lightning Network in an effort to create a more user-friendly and cost-effective experience for their users. Additionally, the relatively new startup Lolli has a master plan for eventually taking Bitcoin payments mainstream.
Longhash recently covered the general resurgence of payments-focused Bitcoin startups powered by the Lightning Network.
While the Lightning Network is improving the Bitcoin payments experience from a technical perspective, a serious regulatory hurdle remains for the cryptocurrency in terms of how it is taxed.
Bitcoin’s Tax Issue
In the United States and many other countries, Bitcoin payments are treated as taxable events. In other words, Bitcoin users should be tracking the capital gains they accrue when they buy something with the cryptocurrency. From a tax perspective, a Bitcoin payment is treated the same as a sale of one’s Bitcoin holdings.
Technically, this policy applies to everything from the purchase of a house to buying a coffee in the morning on the way to work.
How Serious is This Issue?
But how serious is this tax issue? After all, part of the cypherpunk philosophy behind Bitcoin is that the rules and regulations of the traditional financial world do not apply to this new digital cash system.
The seriousness of the tax problem was debated by Bitrefill CEO Sergej Kotliar and ShapeShift CEO Erik Voorhees during a panel discussion at the Bitcoin 2019 conference in San Francisco.
For Voorhees, the tax implications of making Bitcoin payments are too much of a burden for many potential cryptocurrency users.
“An average person on the street that wants to buy something for $20 with Bitcoin, they’re not going to care if they’re not reporting taxes on that. Those types of people, in terms of spending power, represent a very tiny amount. The actual [majority] of spending power generally comes from people, by definition, with more money.
Those people tend to, by definition, care more about tax consequences,” explained Voorhees.
The ShapeShift CEO went on to note that the tax burden associated with using Bitcoin for everyday payments overshadows the potential benefits of using the peer-to-peer digital cash system.
“Even if they’re totally cool with the volatility, even if they totally understand the technology, even if they’re okay with a $5 fee on a $50 transaction — having to spend a while reporting that and tracking that and the risk of not tracking that correctly actually becomes the real cost,” said Voorhees.
While Kotliar admitted that Voorhees brought up a fair point, he also added that there are plenty of people who would take their Bitcoin payments as an opportunity to make a political statement of sorts.
“If you want to change a certain regulation, it helps doing things that will make an attacking regulator look silly. So, if the government goes after everybody who buys a cup of coffee for $5 [with Bitcoin], they’re going to look silly,” said Kotliar.
Kotliar then clarified that he was not saying everyone should go out and use Bitcoin to avoid taxes. Instead, this is more about making regulators’ jobs difficult.
Voorhees responded by pointing out that, while everyone at the Bitcoin conference would understand the point of using Bitcoin to make a political statement, the average person simply does not care about this sort of thing.
“If you combine making a risky political statement with your payment versus just pulling out your credit card, they’re always going to choose the latter,” said Voorhees.
Kotliar responded by saying Bitcoin payments can be a useful alternative for traders who would rather sell their Bitcoin in a manner that is not closely tracked and reported, as is the case with exchanges.
“For us at Bitrefill, we don’t see the credit card as the competitor. We see the exchange [as the competitor]. If you’re going to dump [your Bitcon], then dump on Bitrefill instead,” said Kotliar.
At this point, Voorhees concluded this part of the panel discussion by pointing out the increased mental burden of tracking the tax implications of every Bitcoin payment rather than simply dealing with the tax obligations of one large sell order on an exchange. Cryptocurrency Markets Gain Billions