Donald Trump has chosen pro-Bitcoin Mick Mulvaney to act as the White House Chief of Staff come 2019.
According to a report from 2016, Mulvaney acknowledged that the Federal Reserve has “effectively devalued the dollar” and followed up by mentioning that Bitcoin is a currency “not manipulatable by any government.”
Introducing a cryptocurrency optimist to the White House is a positive signal for the future of the industry. With the United States being one of the largest consumer markets, it can have a global impact if the citizens of the US become more educated and invested in crypto.
Oddly enough, Mulvaney has a contentious past with Trump, especially during Trump’s presidential campaign. In a debate before the election, Mulvaney said:
“Yes, I am supporting Donald Trump but I’m doing so as enthusiastically as I can, given the fact that I think he’s a terrible human being.”
There are strong words, but hopefully, his new position as Chief of Staff will help to rebuild his relationship with Trump in a positive way and ultimately, push the blockchain industry forward towards mainstream use.
Aside from education, there are also clear tax issues which need to be revised to reach mainstream adoption. It would be ideal if Mulvaney can help in this initiative.
Arguably, the way in which cryptocurrencies are taxed in the US can be significantly improved. Currently, cryptocurrencies are taxed similar to property, but not like real estate which has like-kind exchanges.
This means that each trade is a taxable event, triggering a realized gain or loss even if the trader did not sell back to USD. For example, if Bob purchases Litecoin with Bitcoin, then this is a taxable event. The IRS assumes that Bob sold Bitcoin to USD, then purchased Litecoin with USD, which is not the case. The US dollar was never touched in this Bitcoin to Litecoin transaction.
On the contrary, with real-estate, there are like-kind exchanges, also known as a 1031 exchange. This is a transaction type which allows for the sale of one asset and immediate purchase of another, without generating a tax liability. Many believe that the same like-kind exchange should be allowed for crypto to crypto transactions. It is assumed that many people cannot afford to pay their taxes since taxes must be paid with USD. To pay their taxes, investor and traders would need to sell their crypto to USD, which is another taxable event, just to pay taxes from previous cryptocurrency only trades. This is not only an accounting nightmare but also significantly hurts profits for cryptocurrency traders.
Another interesting perspective is to consider the fact that many people trade to accumulate cryptocurrency, not the US dollar. To be clear, many people trade explicitly to accumulate Bitcoin instead of USD.
Here’s where this gets interesting. Let’s say Bob is trading Bitcoin against other cryptocurrencies with the goal of accumulating Bitcoin, all while ignoring USD value. Meanwhile, Bitcoin’s USD value skyrockets from $1,000 to $20,000 much like it did from 2017-2018 and altcoins drop. As a result, Bob most likely has unrealized gains in USD, but unrealized losses in satoshi value. In other words, Bitcoin’s increase in USD has outperformed many of the altcoin dips.
To bring this full circle, let’s walk through a practical example. Bob purchases XYZ coin at a value of .01 satoshi (a rate of .01 Bitcoin). At the time of purchase, Bitcoin is priced at $1,000, which means XYZ would cost $10 (.01 * $1,000) if it can be purchased directly with fiat. A few months later, Bitcoin reaches $10,000 and XYZ’s price drops to .005 Satoshi, in terms of Bitcoin.
At this point, Bob is holding XYZ coin which is valued at $50, up 400% from the purchase price, but down 50% in Bitcoin value. If Bob wants to cut his Bitcoin losses and sell XYZ coin back to Bitcoin, then he will owe taxes because in terms of USD he has a realized gain, even though he is in losses from the satoshi perspective – which is what he is concerned with.
With these tax headaches lingering over cryptocurrency investors, it is our hope that the IRS and government officials will one day revise the tax code regarding cryptocurrency trade. Perhaps Mulvaney will be a catalyst for this change.