The following article was submitted by Tamara Backovic, Content Specialist at fortunly.com.
Bitcoin has been teeming with potential since the day it was rolled out. Of course, the timing of its introduction helped, giving humankind a promising alternative to the fundamentally broken fiat money at the height of the 2008 financial crisis. Many people around the world were not aware of its existence and what it represented at that time, but Bitcoin eventually attracted well-deserved attention.
This fabled digital asset ushered in the age of cryptocurrency. However, BTC remains far from mainstream adoption to this day. It has mesmerized technologists since day one. But it has also attracted speculators who are more interested in making bank than cementing its place as a reliable medium of exchange in the global economy.
Bitcoin gained notoriety after the great crypto crash of 2018. It has steadily recovered since then, though. The virtual coin even surpassed the $9,000 mark recently, confirming that more and more investors are once again bullish.
The first crypto is starting 2020 strong. Although it is premature to say that there will be no terrifying price fluctuations in the months ahead that might scare more people who wish to climb on the crypto bandwagon, it remains to be seen if a greater number of Americans will embrace it given the current trend in the crypto world. To see where BTC could be by the end of the year, let us look back a little bit to understand the context.
The Money That Is Rarely Spent
The folks at SpendMeNot say that Bitcoins are now accepted by numerous merchants in more than a dozen industries. It is possible to buy an engagement ring, pay a cable bill, book a hotel, watch a movie, and donate to charity with the cryptocurrency.
It is encouraging to see more and more businesses entering this uncharted territory. But how are consumers reacting to this new payment option? Quite passively.
In 2019, most of the Bitcoins in circulation were traded, not spent. That came as no surprise since crypto exchanges sprung up like mushrooms. No one uses and understands digital assets more than traders, so it was natural for BTC not to replace cash last year.
The few people who actually buy Bitcoins who do not call themselves pro traders, treat this digital currency like gold. Individuals, especially in areas plagued with economic and political turmoil, have used it as a wealth-preservation tool during times of uncertainty and instability.
The past year had no shortage of examples, and Hong Kong was a shining one. The social unrest in the Chinese territory drove up the conversion rate of fiat into Bitcoin.
Then again, the notion that the cost of spending the coin was more expensive than a cup of joe was not widely accepted last year. Relatively, Bitcoins were spent more frequently last year due to the decline of their transaction fees.
Obviously, the BTC community is still divided over whether the digital coin should be promoted as a currency or be traded like a hot commodity that it is. Neither side can stop the other, so the tug of war rages on with no end in sight.
10 Years of Meager Market Penetration
2019 was a big year for BTC in the United States. By December last year, the number of Bitcoin ATMs worldwide reached over 6,000. The vast majority of them were installed in the US (75%). According to data, the country controls 66.2% (Source: cryptoglobe.com) of these crypto machines globally.
This exciting news means purchasing the digital coin is as easy as buying peppermint mocha at Starbucks in the streets of US cities like San Francisco or Tampa. It is clear that the growing number of the so-called BTMs is an attempt to encourage the American public to join the Bitcoin revolution. Has it worked?
The physical presence of these machines will likely have a positive impact on the marketing department in the long run. After all, It is hard to trust some form of money that is not tangible, which is why cash is still undefeated.
The rapid increase in the number of Bitcoin ATMs, however, may not suffice to encourage ordinary American consumers to give any cryptocurrency a try. The fees these machines charge are rather prohibitive. The high exchange rates do not help promote usage too. The souls who would dare to fill their digital wallets are probably the same ones who have had digital currencies in the first place.
Furthermore, the high number of BTMs in the US might not have been influenced by rising demand. The most prolific manufacturer of Bitcoin ATMs in the world is California-based Genesis Coin. It probably was not a coincidence that the company wanted to give priority to its backyard.
In 2018, some estimates showed that only 5% of the American population bought Bitcoins, and, according to CNBC, another 3% invested in some altcoins. If these statistics did not improve last year and if many adopters have yet to use digital coins as actual money, then the US enormous crypto market stays untapped. Americans have not been the biggest fans of fintech to begin with. But Bitcoin is unlikely to experience mainstream adoption without high market penetration in the US.
A Discouraging Approach to Crypto Taxation
Bitcoin flew under the radar of the Internal Revenue Service (IRS) until 2014. Prior to that year, it was used for transactions without any intervention from the US government. However, Uncle Sam realized that it could become a vehicle for money laundering in the black market. As a response, the IRS issued official guidance on cryptocurrency, which labeled BTC as property.
Being recognized by the IRS was proof of the increasing importance of Bitcoin in American society. Sadly, the treatment of the coin imposed by tax authorities has stunted its growth.
The US considers any activity that causes BTC to change hands a “taxable event.” If a Bitcoin was held for less than a year, its holder must pay income tax upon its transfer to another person or entity. But if held for more than 12 months, the rules for capital gains tax would apply. In other words, buying any goods or paying someone for a service with Bitcoin has to be reported to the IRS. If not, one can face harsh punishments.
Furthermore, Bitcoin losses can be used to offset taxes on better-performing investments under specific rules. If not used to reduce gains earned elsewhere, the losses can be deducted instead.
Reporting all Bitcoin-related transactions is humanly possible. However, most American BTC holders have not been able to do so since diligent record-keeping is paramount to track them all and accurately file taxes.
The IRS has threatened to file criminal complaints against thousands of alleged tax evaders who have been avoiding paying taxes for years. Despite the government’s warning, lots of crypto holders have demonstrated bravery, ingenuity, or foolishness by continuing to use BTC at the risk of committing tax fraud.
These possible fraudsters might have been able to escape the long arm of the law for a long time, but curious first-timers might not share their courage. The intensifying rhetoric from the IRS might have discouraged new Americans from adopting Bitcoin more than inspired current and aspiring users to file taxes properly.
A Friendlier Law on the Horizon
Bitcoin taxation in the US was doomed to fail from the start. The wild price swings of the digital currency mean that calculating how much the Bitcoin appreciates or depreciates over time is a nightmare. Some frequent traders and savvy investors understand that the IRS likes consistency, so they live by philosophies like “last in, first out” or “first in, first out” to legally reduce their taxes.
To the average consumer, using Bitcoin for everyday purchases and payments is not worth the trouble due to demanding tax reporting. If ordering pizza with Bitcoin could get someone jailed for inadvertent underreporting of any gains earned through the currency, only a fool would run the risk of using it.
Fortunately, Bitcoin enthusiasts in America could get a break they have been waiting for very soon. The Virtual Currency Tax Fairness Act of 2020 was proposed in Congress recently. This bill enjoys bipartisan sponsorship and aims to give reasonable tax treatment of cryptocurrencies. The new act intends to enable tax exemptions to low-value crypto transactions on a day-to-day basis the same way the US government treats any other foreign currency. It might not spell the beginning of the end for the greenback, but it could at least level the playing field for cryptocurrencies and realistically drive up the adoption rate of Bitcoin in the States.
The legitimacy and survival of any digital coin as a currency depends on several variables; government support in the form of rational regulation is one of them. The work of the crypto lobby is far from accomplished, but the existence of the act is an indication that hope for mass Bitcoin adoption in America is very much alive.