The Bitcoin Policy Institute is calling on U.S. lawmakers to rethink tax rules that treat every payment made with Bitcoin as a capital gains event.
The group claims that the existing system makes it too complicated to spend their Bitcoins on day-to-day purchases.
The Internal Revenue Service currently considers Bitcoin to be an asset rather than a currency. This means that when an individual spends their Bitcoins, even for something as minor as a meal, it is considered to be a sale. If the individual has seen an increase in the value of their Bitcoins since they first purchased them, they are subject to capital gains tax for the difference.
Bitcoin tax rules complicate everyday payments
Although the rule may be reasonable from a regulatory point of view, it has also been accused of creating a problem for users in practice.
In essence, each time a user wants to spend their Bitcoin, they must be aware of the price at which they initially acquired the currency, calculate the price at which they are acquiring the goods or services at the time of transaction, and then account for any gains or losses.
The Bitcoin Policy Institute has gone on to argue that this has the overall effect of deterring users from actually using the currency for payment.
In essence, users end up using it for investment purposes only, choosing to hold onto it rather than spending it due to the tax implications.
In order to remedy this problem, the group has proposed that policymakers consider introducing measures that will ease the management of small Bitcoin payments from a tax point of view.
One policy that has gained significant traction is the exemption from capital gains tax for small transactions, which include purchases.
Market participants largely in favour
Supporters say that this kind of change could make Bitcoin work more like a real payment tool and make things easier for users.
As digital assets become more popular, debates like this one show how hard it is for regulators to change tax systems to keep up with new financial technologies.