The United States government has provided legal guidance on the treatment of virtual currencies resulting in significant controversy and confusion among politicians and citizens alike.

The Internal Revenue Service (IRS) issued Notice 2014-21 in March of 2014 providing guidance on how existing general tax principles apply to transactions using virtual currency. In the notice the IRS clarifies that existing general tax principles apply to transactions using convertible virtual currency and that such virtual currencies should be treated as "property" rather than "currency" for US federal income tax purposes. Currency is defined as:

 “The coin and paper money of the United States or of any other country that is designated as legal tender and that circulates and is customarily used and accepted as a medium of exchange in the country of issuance. Currency includes U.S. silver certificates, U.S. notes and Federal Reserve notes. Currency also includes official foreign bank notes that are customarily used and accepted as a medium of exchange in a foreign country.” Code of Federal Regulations, “C.F.R”, 31 CFR §1010.100(m).

The IRS did not designate virtual currency as “currency” for federal income tax purposes stating that:

“In some environments, virtual currency operates like “real” currency … but it does not have legal tender status in any jurisdiction.”

The IRS chose to treat virtual currency as property rather than currency because virtual currency is not legal tender. Tax treatment as property creates a burdensome record-keeping requirement of tracking virtual currency prices against the dollar at the time of acquisition versus the time of use, making virtual currencies more difficult to utilize in commerce.

The IRS guidance is a start but fails to clarify and expand on many issues on virtual currency tax treatment. Some have criticized the guidance as outright wrong and others have criticized it as unclear and in need of further explanation.   

Former Congressman of the 36th district of Texas, Steve Stockman, disagreed completely with this IRS guidance. Stockman introduced the bill, H.R. 4602, during the 1st session of the 113th Congress titled “The Virtual Currency Tax Reform Act” on May 7th, 2014, a few months after the IRS guidance, proposing a change to the tax status of virtual currency from property to foreign currency. Stockman also included a moratorium for a period of five years following the date of the enactment of the Act where the Federal Government shall not impose, assess, collect, or attempt to collect capital gains tax on virtual currencies. Unfortunately this proposed legislation failed to advance out of Committee.

Stockman didn’t stop there. In the 2nd session of the 113th Congress, Stockman introduced the bill, H.R. 5777, titled “Cryptocurrency Protocol Protection and Moratorium Act” on December 12th, 2014. This bill criticized the IRS Notice claiming that, “Congress believes that the current guidance is less than optimal for the American people and economy.” In addition, the bill called for a five year moratorium similar to H.R. 4602 stating that doing so “is crucial to overall economic growth, will enhance the economic well-being of the American people and will otherwise be in the public interest.” This moratorium is broader than H.R. 4602 stating that:

“Neither the Federal Government nor any State or political subdivision thereof shall impose any statutory restrictions or regulations specifically identifying and governing the creation, use, exploitation, possession or transfer of any algorithmic protocols governing the operation of any virtual, non-physical, algorithm or computer source code-based medium for exchange for a period beginning June 1, 2015, and extending five years after the enactment of this Act.”

Lastly, the bill declared that virtual currencies should be treated as currency instead of property, “in order to foster an equitable tax treatment and prevent a tax treatment that would discourage the use of any cryptocurrency.” The bill continues to declare: “Tax treatment of cryptocurrency as property does not account for the substantial illiquidity and highly limited acceptance and use of cryptocurrency, and substantially and unfairly discourages taxpayers engaging in a trade or business from using cryptocurrency in commerce.”  This proposed legislation also failed to advance out of Committee.

Finally, on January 2nd, 2015, the last day of the 113th Congress, Stockman introduced the bill, H.R. 5892, titled “The Online Market Protection Act of 2014” which mirrored H.R. 5777 with a few additions. This bill called for a five year moratorium similar to H.R. 5777 but including “Smart Contracts” declaring that: “these advances promote the autonomy and liberty of individuals and small businesses at the expense of needless bureaucracy”. This bill also requested that Federal and State Agencies consider cryptocurrencies as “exempt commodities” akin to gold and silver rather than “excluded commodities”. Lastly, the bill declared that cryptocurrencies should be treated, for tax purposes, as currency instead of property further reasoning that:

“Such tax treatment is inconsistent with the tax treatment of secured notes for payment in trade or commerce, which recognizes a discount from the face value of the note due to the illiquid nature of the payment. (Note: See IRS Pub. 525 at 4.)”    

Some might question why a congressman would introduce a bill on the very last day of Congress, surely the bill would not be decided on in such a short amount of time. The reason for doing this is often to signal that the bill will be introduced in the new Congress. The bill did not advance out of the Committee unfortunately. Stockman ran unsuccessfully for the Senate in the fall of 2014 and lost his House seat, so he won’t be introducing this resolution in the 114th Congress.

The Online Market Protection Act of 2014 could still, however, be revived if a current congressman or woman re-introduces the bill.

Recently, the American Institute of Certified Public Accountants (AICPA) wrote a letter dated June 10th, 2016 to the IRS requesting clarification on virtual currency treatment as property. In this letter the AICPA encourages the IRS to release additional, much needed, guidance on virtual currency as it continues to expand and gain additional popularity in the marketplace.

Specifically, the AICPA requested further guidance on 1) Acceptable Valuation and Documentation; 2) Expenses of Obtaining Virtual Currency; 3) Challenges with Specific Identification for Computing Gains and Losses; 4) General Guidance Regarding Property Transaction Rules; 5) Nature of Virtual Currency Held by a Merchant; 6) Charitable Contributions; 7) Virtual Currency as a “Commodity”; 8) Need for De Minimis Election; 9) Retirement Accounts; 10) Foreign Reporting Requirements for Virtual Currency.

 The AICPA applauded the IRS for issuing this much-needed guidance but, as stated in their letter, many issues, some of which major issues, have yet to be resolved. The IRS has not issued a response to the AICPA letter.

This letter by the AICPA could generate renewed interest in Stockman’s Online Market Protection Act of 2014. All these issues could be resolved by changing the tax treatment of virtual currency from property to currency as indicated in the Act. Contact your local congressman or woman, or legislative director, and demand that they revive this bill. 

Jeffrey Berns and Emmanuel Rayes

Jeffrey Berns and Emmanuel Rayes are lawyers for Berns Inc. and ETHNews. Read More
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