People's Money
At the heart of this proposal is the good fortune that “we the people” are able to issue our own money and use it to address our own needs. Both domestically and abroad, this practice has been commonplace for centuries and remains a standard practice worldwide.
In the U.S., non-federal currencies that go by various names such as local, regional or community currencies have been used throughout our history, first as paper money and now increasingly issued digitally.
They come in many familiar forms, from popular “Buy Local” campaigns, to credit card mileage awards and, most commonly, coupons that Americans use daily. (Local virtual currencies should not be confused with “crypto” currencies which are speculative, regulated securities. By contrast, local virtual currencies are simply mediums of exchange, transacted now digitally, similar to how debit cards, mobile wallets or banking apps work.)
That FED article mentioned above states clearly:
“The government isn’t the only entity allowed to issue money. Private citizens and businesses can too, and throughout U.S. history, they often have.”
Done right, a local currency can effectively bootstrap a local economy, allowing the people to lift themselves up rather than rely on external sources like banks or the federal government for assistance. However, successfully launching a local currency requires educating a sufficiently large group of individuals and businesses on the benefits of using a local currency just as they would use U.S. dollars. Unfortunately, current federal tax policy inhibits achievement of this critical mass.
Currently, when two or more parties exchange goods or services using any form of currency, the IRS considers such transactions taxable (as if they were conducted in US dollars) if they exceed the thresholds that trigger taxability. The problem is the IRS requires the tax to be paid in dollars rather than the currency used. The net effect is that many local economic development programs, based on the issuance of a local currency, die before they get off the ground, or expire before delivering sustainable benefits to their communities.
However, if all transactions using non-profit issued currencies were to be exempt from federal taxation, even for a prescribed period of time, then many such programs would be enabled.
How Can the Federal Government Help?
The Congressional Solution
A small rider attached to just about any bill would address this taxation problem, such as a taxation bill or an appropriations bill. Doing so would have profound, positive and lasting impact. Any must pass bill during this Congressional term would also be an option.
And given that President Trump has issued this digital assets oriented executive order1 that benefits holders of cryptocurrencies, a case can be made that this virtual currency oriented bill should also include benefits to the rest of society (the 86% that do not own cryptocurrencies),2 and allow Congress to claim it supports everybody, not just the wealthy.
The proposed rider would require the IRS to exempt certain community virtual currencies from federal taxation, and require the Federal Reserve to purchase those currencies from banks and credit unions. Here is the essence of our recommendation:
- Require the IRS to exempt from federal taxation all transactions in community virtual currencies issued for regional economic development purposes by non-profit organizations registered under IRS section 501(c)(3) or 501(c)(4).
- Require the Treasury or the Federal Reserve to purchase those community virtual currencies from banks and credit unions. That would free up local banks’ and credit unions’ balance sheets and enable them to deploy vital capital critical to their communities’ stability and growth.
And while simple in concept, the ramifications of these two elements being enacted would be hard to overestimate—their inclusion and passage in any bill will have profound impact. Taking these two simple steps will greatly enhance the ability of local economic development groups to bootstrap jobs programs, accelerate infrastructure improvements, address food insecurity, and much more—all activities ultimately resulting in increased regional GDP, aiding small business, improving community assets, and advancing future bank-ability.
This page3 provides an explanation of the proposed legislation.
This page4 provide the proposed text of the rider.
The Administrative Solution
Even though the below Congressional proposal should be supported on both sides of the aisle, the current partisan divide may complicate or delay its implementation.
There is an alternative, although less likely under President Trump. Given the nature of the changes required in taxation, those can be applied within the Internal Revenue Service. The IRS is an agency of the Department of the Treasury, part of the executive branch of government and therefore under the control of the President.
There is much a President can do unilaterally under the powers of the Presidency, potentially augmented by the enhanced powers recently ruled on by the US Supreme Court. One such area is in the form of Executive Orders. (For a more in-depth exploration of executive orders, see this Congressional Research Service document Executive Orders: An Introduction),5 and this explanation6 of them.
The President can issue an executive order to require the IRS, under the auspices of the Secretary of the Treasury, to exempt from federal taxation all transactions in community virtual currencies issued for regional economic development purposes by non-profit organizations registered under IRS section 501(c)(3) or 501(c)(4) under the existing rules concerning exempt activities on the part of such non-profits. That is done by simply stating that such currencies would be considered as part of those non-profits’ exempt mission.
In addition, banks and credit unions could serve as “clearing houses” for those currencies, purchasing them the public (at a slight discount like a foreign exchange service) thereby providing a means to convert those currencies into dollars. In turn, the President can mandate that the Department of the Treasury purchase those community virtual currencies from those banks and credit unions at full value, yielding a profit for those banks and credit unions.
Some agencies are independent of Presidential authority and therefore not subject to an executive order, including the Federal Reserve (FED). The President does not have control over the FED (Congress does). Nonetheless, the president can request that the FED take action to support this effort, and in particular, the Treasury Department could “encourage” the FED to purchase from the Treasury, those virtual currencies acquired by Treasury, in a fashion very similar to the manner in which the FED purchases all manner of assets from banks (including worthless toxic assets). Thereafter the FED would just keep those currencies on its balance sheet, just like they do with the assets purchased from banks.
This page7 provides the proposed text of that executive order and what it entails.
What Can Be Done with this Concept?
The document, Virtual Currencies, IRS, Treasury & Federal Reserve8 provides an in-depth look at complementary currencies and how making some exempt from taxation can have a widespread and positive impact on society. And these documents, The Housing Crisis,9 and Food, Fuel and Jobs10 provides a detailed exploration of a couple of key, but profoundly impactful things, that can be done if this proposal is adopted.
2 https://coinweb.com/trends/how-many-americans-own-crypto/
3 https://wethepeoplecampaign.net/legislation
4 https://wethepeoplecampaign.net/the-lift-act/
5 https://crsreports.congress.gov/product/pdf/R/R46738
7 https://wethepeoplecampaign.net/executive-order
8 https://scf.green/doc/VirtualCurrenciesIRS-FED.pdf