Winnings accrued from gambling cryptocurrency should not be treated as a taxable event. It only makes sense to tax such gains when they become legal tender. To do otherwise undermines a marquee environmental policy of the administration of US President Joe Biden.
The Internal Revenue Service seems strongly inclined to try betting winnings as immediate income. The penalties for siding with the IRS can be draconian. And taxing, or threatening to tax, gambling profits is bad policy, and, Ahembad policy.
There are many excellent reasons not to treat gambling winnings themselves as taxable events. The best reason is to get the IRS back in line with the White House's environmental policy to combat climate change.
If the IRS does not administratively comply with the marquee policy clearly laid out by the Biden administration, it is time for Congress to clarify the law and prohibit taxing unrealized profits.
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Deferring the proceeds until the sale simply defers the collection of taxes by the Treasury. It doesn't cost the government a single skinny satoshi. So, what is happening??
Crypto is rightfully taxable in many ways. You will pay taxes when you sell your crypto, or even trade it for other forms of crypto. (Elsewhere, we have called on Congress to enact a deferral of crypto-to-crypto exchanges, a topic that is beyond the scope of this article.)
Taxing participation gains is the antithesis of a clearly expressed White House marquee policy. It is also antithetical to generally accepted notions of good fiscal policy.
Uncle Sam doesn't tax Jasper Johns as he turns a blank canvas into a multi-million dollar work of art. He pays no tax when he consigns it to a gallery for sale at a published price. He is taxed when he is given the million dollar check for his latest masterpiece.
This obviously makes sense. Uncle Sam won't take a piece of a painting (or even a fraction of the interest) in paying taxes. How is an artist expected to pay tax on a work in progress or a work that is simply listed for sale? Taxing works of art during their creation would be ridiculous!
Uncle Sam does not tax a building contractor while building a house, even when turning it over to a realtor to sell. The IRS collects sales tax.
This obviously makes sense. One can only guess at the value of an asset until it is sold, and even then, one does not have the cash to pay the taxes until the proceeds from the sale are received. In addition, the IRS does not "make windows," nor does it accept lumber or any other in-kind tax payments. Taxing houses under construction would be absurd!
Taxing profits from interests while they are in progress is meaningless and inconsistent with the treatment of other created assets. The IRS has established a real Alice in Wonderland policy in this case. And taxing such profits does Americans, and America, real harm, fueling wealth creation and good jobs abroad (contrary to stated Presidential policy)!
However, perhaps the most compelling reason for the IRS to stop taxing share earnings, and if it doesn't, for Congress to fix this immediately, is that President Biden has made emissions reductions CO2 a top management priority.
The IRS taxes participation gains at the time of occurrence (rather than the sale or exchange of those gains) seriously undermines two of the administration's top priorities: secure good jobs and fight climate change. Does bureaucracy trump democracy? Shameful!
It can be assumed the support of the Democrats in the House for the leader of his party for prohibiting the taxation of gambling profits. And there are certainly enough sophisticated Republican congressmen to pass a law that would prohibit taxing gambling winnings.
Related: Prepare for a swarm of incompetent IRS agents in 2023
So what (no pun intended) is at stake? Proof-of-work cryptography uses much more power and generates many more emissions than proof-of-stake. According to the fact sheet from the White House Office of Science and Technology with date of September 8, 2022:
โFrom 2018 to 2022, the annualized electricity use of global crypto assets grew rapidly, with estimates of electricity use doubling or quadrupling. [...] Switching to alternative crypto asset technologies like Proof of Stake could dramatically reduce overall power usage to less than 1% of current levels."
Taxing those gains before they are realized will also stall the movement to proof of participation.
To summarize, there are intractable practical problems in taxing an asset at its creation. People can only guess the value of an asset until it is sold. The IRS does not accept in-kind payments (if that is possible, as it often is not).
Many taxpayers don't have the actual cash to pay their taxes until they get the proceeds of the sale. It is cruel and self-defeating to turn upstanding citizens into tax evaders and criminals through poor regulation. It will drive cryptocurrency, and the corresponding jobs and wealth creation, out of the United States. And deferring taxes until the sale postpones but doesn't cost the government any tax revenue.
Above all, treating participating gains as a taxable event undermines the Biden administration's stated top priority of relocating jobs and reducing CO2 emissions.
Stop treating participation gains as a taxable event! If Biden and the IRS turn a deaf ear, Congress should address the issue.
todd white is the founder of the American Blockchain PAC. ralph benko He is the main director of the group.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
