Crypto Payments, Even for Taxes, Might Come Sooner That Investors Think

As the institutional and regulatory pivot toward more pro-crypto, or at least less anti-crypto, stances and positions continues, there remains one specific area

A bill that would allow U.S. taxpayers to pay federal taxes using bitcoin was introduced by Florida Representative Matthew Gaetz on Thursday. The legislation, if passed, would direct the US Treasury to develop and implement a system to enable bitcoin tax payments to be processed, as well as amending the IRS tax code to allow such a payment option.

While the prospect of being able to pay taxes with bitcoin may appeal to some crypto investors, especially those who have realized substantial gains in recent months, the likelihood of this bill becoming law is considered low. Despite this, the bill's introduction marks a significant development in the broader conversation around crypto payments and tax treatment.

This isn't the first time a legislation like this has been proposed, or even the first time paying taxes with bitcoin has occurred in the U.S. Before pausing the program in 2019 due to technical difficulties, Ohio was the first state to launch a pilot project allowing residents to pay specific state taxes and other fees using bitcoin. Following this pilot, several other states, including Colorado and Florida, permitted residents to use bitcoin to pay specific taxes and fees.

But the question remains whether bitcoin investors actually want to pay taxes using bitcoin, putting tax policy aside.

Most bitcoin is rarely traded, despite retail discussions on social media and recent institutional buying and the narrative of bitcoin being ‘hot potatoed around the world.’ Even with recent profit taking amid the bull market in 2024, over 60% of bitcoin has not moved in the last 18-months. Long-term hodlers are not a new development in the crypto market, but the fact that such a large percentage remains unmoved despite recent market run-ups is a sign of how little interest bitcoin investors have in spending their bitcoin holdings.

This is also driven by the fact that, despite the narrative of institutions entering the market and driving up the price of bitcoin, on-chain metrics and analysis show that retail investors are largely responsible for the recent price action and buying. This is also evident in the fact that bitcoin options markets remain largely retail driven, despite institutional interest in the asset class and the availability of bitcoin futures exchange traded funds.

Furthermore, being able to pay federal income taxes using bitcoin is fine, but if every other transaction generates a tax liability, tax reporting obligation, and potential headaches with data collection and preparation, this will continue to deter the usage of bitcoin as a medium of exchange.

However, since it's still improbable that any bill that would substantially alter U.S. crypto policy will pass into law in the near to medium term, the analysis of any one specific piece of proposed legislation might seem like a moot point. That misses the larger importance of these proposed changes, as mainstreaming the idea of crypto payments across the board is a sign of how far the conversation has rapidly moved.

The SEC no longer has unchallenged control over the regulatory conversation, having faced multiple setbacks and a recent lawsuit filed against it by Coinbase. In its place is an environment where crypto and tokenized applications are finally emerging from the shadow cast across the sector by the collapse and criminal activity at FTX, albeit still contentious and viewed with suspicion by some lawmakers.

Crypto payments for taxes and otherwise continue to move from concept to reality; this is good news for crypto and U.S. innovation overall.

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