Virtually No Tax Guidance for Virtual Currency
Crypto, a.k.a. virtual, currency has been hailed as a very useful tool in the digital age. While it attracts skepticism in its sustainability as it exists only in cyberspace, is not backed by any government or bank, and its value fluctuates often, the use of virtual currency, such as Bitcoin, has gained enough popularity and use to be recognized and taxed by the Internal Revenue Service (IRS). Recognition by the IRS, however, doesn’t necessarily mean that individuals and businesses that transact using virtual currency know exactly how to categorize, treat, and most importantly, account for such transactions. In response to uncertainty surrounding the accounting of virtual currency, the IRS issued a Notice in 2014 to address common questions about virtual currency transactions, which the IRS regards as “property” transactions.[1] [2] [3] But the Notice was a “mixed blessing—the Notice gave welcomed but limited guidance, as it left many important questions unanswered. Thus, “[o]n one hand, it provides legitimacy and clarity for bitcoin purchasers. On the other hand, it makes it more messy for individuals to use it in transactions," stated James Angel, a visiting professor of finance at the University of Pennsylvania Wharton School.[4]
Essentially, tax treatment depends on how the crypto-currency is held and used.[5] For Bitcoin, the following are some examples:
- Bitcoin miners must report receipt of the virtual currency as income.
- Bitcoin used to pay for goods and services taxed as income.
- Bitcoin held as capital assets are taxed as property.
- If Bitcoins are received for providing goods or services, one must include in one’s earnings the fair market value of the virtual currency used on the date it was received.
- Likewise, if one pays for goods and services using Bitcoin, such transactions must be included in one’s expenses at the fair market value in U.S. dollars of the virtual currency as of the date it was paid out.[6] [7]
Moreover, while we know the IRS treats virtual currency as transactions involving “property,”, not all property related accounting and taxation principles and applications, as far as the IRS is concerned, apply to such transactions. Without more guidance from the IRS, therein lies a potential accounting and taxation nightmare.
Highlighting the accounting and taxation uncertainty, on June 13, 2016, the American Institute of CPAs (AICPA) urged the IRS to issue additional guidance on virtual currency transactions, noting the diverse uses and businesses requiring further IRS guidance, such as:
- Acceptable valuation and documentation;
- Expenses of obtaining virtual currency;
- Challenges with specific identification for computing gains and losses;
- General guidance regarding property transaction rules;
- Nature of virtual currency held by a merchant;
- Charitable contributions;
- Virtual currency as a “commodity;”
- Need for a de minimis election;
- Retirement accounts, and
- Foreign reporting requirements for virtual currency. [8]
While, as the AICPA letter noted, the IRS worked “expeditiously” to issue the 2014 Notice, the 2 plus years of silence by the IRS should be broken to provide a variety of much-needed guidance for crypto-currency, particularly in light of its growing use and acceptance as a global medium for trade and business.[9]
—By Keobopha Keopong, Esq., Barnes Law
Keo Keopong is an associate attorney with Barnes Law, licensed to practice law in California.
The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] IRS Notice 2014-21 <https://www.irs.gov/pub/irs-drop/n-14-21.pdf>.
[2] The IRS’s treatment of virtual currency transactions as “property” transactions has been likened to the “taxation of bartering”. (http://www.forbes.com/sites/irswatch/2014/12/04/irs-approach-to-taxation-of-bitcoin/#4504aca6198c)
[3] This means that one must to keep track of the fair market value of, e.g. Bitcoin transactions so that a determination of a gain or loss on each one can be made. If you purchase something with virtual currency that has a fair market value greater than the fair market value of the virtual currency, there will be a gain on the transaction, which will need to be reported on one’s tax return. Similarly, if the fair market value of the virtual property is greater than the item purchased, there will be a loss on the transaction, which also needs to be reported on one’s tax return. (http://quickbooks.intuit.com/r/taxes/bitcoin-account-virtual-transactions/#sm.0001kmv44115w0e9tx7rc7guryt44)
[4] http://www.govtech.com/budget-finance/IRS-Decision-to-Treat-Virtual-Currencies-as-Property-is-a-Mixed-Blessing.html
[5] IRS Notice 2014-21 <https://www.irs.gov/pub/irs-drop/n-14-21.pdf>; https://turbotax.intuit.com/tax-tools/tax-tips/Taxes-101/Tax-Tips-for-Bitcoin-and-Virtual-Currency/INF29402.html
[6] https://turbotax.intuit.com/tax-tools/tax-tips/Taxes-101/Tax-Tips-for-Bitcoin-and-Virtual-Currency/INF29402.html
[7] http://quickbooks.intuit.com/r/taxes/bitcoin-account-virtual-transactions/#sm.0001kmv44115w0e9tx7rc7guryt44
[8] https://www.aicpa.org/Advocacy/Tax/DownloadableDocuments/AICPA-Comment-Letter-on-Notice-2014-21-Virtual-Currency-6-10-16.pdf; https://www.aicpa.org/press/pressreleases/2016/pages/aicpa-urges-irs-to-issue-additional-guidance.aspx
[9] https://www.aicpa.org/press/pressreleases/2016/pages/aicpa-urges-irs-to-issue-additional-guidance.aspx
** A related post is available here: http://www.barneslawllp.com/bitcoin-not-real-money-just-property/