El Salvador’s decision to make bitcoin legal tender could shake up US taxes, corporations

El Salvador’s decision to make bitcoin legal tender could change how the IRS taxes people and how corporations use bitcoin.


June 10, 2021

El Salvador’s President Nayib Bukele (Source: The Daily Beast / Twitter)

On Tuesday, El Salvador became the world’s first country to adopt bitcoin as legal tender.

Per CNBC, this change means that “prices can now be shown in bitcoin, tax contributions can be paid with the digital currency, and exchanges in bitcoin will not be subject to capital gains tax.”

The country’s president, Nayib Bukele, marked the occasion by putting “laser eyes” — a popular way to show support for Bitcoin — on his Twitter profile. Why not!?

It’s not just profile pictures that are changing

There could be huge implications for the US, as explained by Forbes’ Avik Roy:

  • Taxation: Today, the IRS classifies bitcoin as property. If you use it to transact — like buy a Starbucks coffee — and the price of bitcoin has changed since you first acquired it, that’s a taxable event. But as legal tender, bitcoin can be used in commerce without being taxed (AKA much less friction).
  • Corporate balance sheets: Current accounting rules are unfavorable to crypto assets. If the price rises, you are unable to mark it up as an unrealized gain. If the price falls, though, you have to write it down. From a corporate accounting perspective, that’s all downside.
    However, if bitcoin is considered a foreign currency — because it’s legal tender in El Salvador — corporations can hold it on the balance sheet under more favorable accounting guidelines.
  • Bitcoin’s future: With the US dollar as the world’s reserve currency, it ideally transacts with all of the currencies of foreign nations. As an official currency for El Salvador, it may become harder for the US to ban bitcoin.

El Salvador itself only has a GDP of $27B, smaller than any US state. It’s yet to be seen how the US government will respond but — with El Salvador’s big crypto move — the questions are in play.

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