The crypto world tells us that Bitcoin, Ethereum and other cryptocurrencies are, well, currencies, to be used in ordinary buy and sell transactions. You might try buying groceries with a fractional Ethereum token to see that there are some pretty severe limitations on crypto commerce; that is just a small part of the difference between using dollars and digital currency.
One of the biggest problems is that under current IRS rules, buyers have to calculate taxes on every single transaction they make using their crypto debit card. So if you bought a position in Bitcoin, and then decided to buy, let’s say (to choose something that is actually sold in cryptocurrencies) a Rolex watch from BitDials or a domain name from Namecheap, you would have to calculate the difference in the price of those token assets when purchased and when used to make a purchase, and enter it on Form 8949 of your tax return. If the token increased in value during that interval, then that purchase would trigger short-term or long-term capital gains taxes. If it decreased in value, that would be represented as a loss.
If you made 20 or 30 purchases in the course of a year, the paperwork burden would add up. Not to mention the nontrivial challenge of knowing the cost basis of all of the parts of the coins that you used in the transaction. The IRS says that you must either specify the cost basis of the specific allotment of Bitcoin or other digital token that you used for the purchase, or you would use the First-In/First-Out methodology, where you would assign, to the purchase, the cost basis to the oldest units of crypto that you own.
If your oldest acquisition of digital currency happened to be less than the acquisition price, then you would assign the first (oldest) currencies first, then the next-oldest, and so forth. The IRS requires that you list the date and time each unit was acquired, the cost and fair market value of the units, the time the unit was used for thepurchase, and all of this on a per-account or per-wallet basis.
A second challenge is the speed of a transaction. Currently, the Bitcoin’s maximum capacity is handling roughly seven transactions a second, compared with, say, Visa, which handles more than 24,000 in a second (or 185,000,000,000 transactions in a typical year). Transactions can wait in line for hours before they move from pending to completed—and this also drives up transaction fees.
Proponents tout the Blockchain system where all transactions are placed on a ledger that is read by all other ledgers throughout the world. But it is fair to wonder about the scalability of having every purchase by every consumer updated on every crypto user’s computer, or (perhaps) more efficient for the bank and the retail vendor to capture a record of each transaction between their two systems. The old-fashioned dollar, or the electronic version that lives in our credit card and bank account systems, may seem clunky to some, but in fact, at least for now, is far more efficient as a means of exchange.
This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice.