Cryptocurrency is on the agenda in Washington.

The Internal Revenue Service is expected to update its 2014 guidance on cryptocurrencies in coming weeks, following an April request from a bipartisan group of 20 lawmakers. It is part of a broader push to boost the nascent cryptocurrency industry. Congress is considering at least three bills that would resolve some of the murky legal issues surrounding digital money.

Since bitcoin’s launch a decade ago, U.S. regulators have struggled to apply a hodgepodge of decades-old laws to digital money, which has frustrated backers of the young technology. The question has taken on added urgency since Facebook Inc. last month unveiled its Libra payments network, the most ambitious attempt yet to get cryptocurrency in the hands of mainstream users.

Crypto’s backers in Washington say regulatory clarity is vital to the sector’s growth. They also worry the U.S. is falling behind: Japan and Switzerland have developed legal frameworks that have attracted cryptocurrency projects and investment. Facebook chose to incorporate the group that will govern Libra in Switzerland.

“The concern I have is really about driving innovation out of the country,” said Rep. Tom Emmer (R., Minn.), who led the congressional delegation that asked for the new IRS guidance.


Regulatory hurdles aren’t the only things standing in the way of crypto’s growth. Bitcoin has struggled to gain traction beyond a core group of techies. Drug dealers and scammers attracted to its anonymity have marred its reputation.

And not everyone in Congress is on board. On Tuesday, Rep. Maxine Waters (D., Calif.) chairwoman of the House Committee on Financial Services, asked Facebook to halt development of Libra until lawmakers can examine the potential risks it poses to global financial stability. The committee is set to hold a hearing on Libra later this month. Facebook plans to work with lawmakers and attend hearings, spokesman Joshua Gunter said.

Still, regulation remains a stumbling block to cryptocurrency’s wider adoption. Taxation, specifically, is among the sector’s biggest issues.

In 2014, the IRS said it would treat bitcoin as an investment property, similar to a stock or bond, making it subject to capital-gains taxes. It didn’t get the same “de minimus” exemption that allows U.S. taxpayers to avoid reporting small gains or losses on foreign currencies when they travel overseas. A U.S. citizen who acquires and spends euros on a vacation doesn’t have to report the purchase as a taxable event, as long as it is under $200.

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The IRS decision created an accounting headache for digital-money users. Under U.S. tax law, bitcoin users have to track the exact price paid for every bitcoin purchase, keep each one recorded separately, calculate the difference when they sell it and apply capital-gains rules. Even the purchase of a cup of coffee using bitcoin could trigger a capital-gains bill.


The rule “is so absurd people just aren’t doing it,” said James Foust, a researcher at the nonprofit advocacy group Coin Center.

The IRS said in a letter to Mr. Emmer that it would address methods for calculating taxes “and other issues.” An agency spokesman declined to comment.

Lawmakers aren’t waiting for the IRS to act. A bipartisan group of House members earlier this year introduced legislation that would grant cryptocurrency a de minimus exemption. The Token Taxonomy Act also would exempt digital tokens from being defined as securities.

“If the IRS issues guidance, then that could provide a lot of certainty the market really needs,” said Rep. Warren Davidson (R., Ohio), one of the bill’s co-sponsors. “It’s ultimately Congress’s job to pass the laws and provide certainty. We’re working on that as well.”


Another proposed bill, the Blockchain Regulatory Certainty Act, would exempt nonfinancial businesses using blockchain—the technology and concepts underlying bitcoin—from being defined as money transmitters. The Blockchain Promotion Act would direct the secretary of commerce to form a working group to study blockchain technology.

Related In an original WSJ documentary, markets reporter Steven Russolillo ventures to Japan and Hong Kong to explore the universe of cryptocurrencies. His mission: create WSJCoin, a virtual token for the newspaper industry. Image: Crystal Tai. Video: Clément Bürge

Write to Paul Vigna at paul.vigna@wsj.com