Bitcoin has conflicting status among federal agencies

On March 25, the IRS released guidelines (Notice 2014-21) regarding cryptocurrencies for tax purposes. The IRS wrote, “[The IRS] is aware that ‘virtual currency’ may be used to pay for goods or services, or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like ‘real’ currency … but it does not have legal tender status in any jurisdiction.” The notice included an FAQ that says, “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”

Tyson Cross, who is considered a Bitcoin tax expert by Business Insider, says, “Users will have to track their transactions and determine the amount of their taxable gain each time. It’s quite a burden. The rules on taxing foreign currency provide an exception for ‘personal transactions’ for that very reason. It would be great to have that exception (or something similar) apply to bitcoins as well.”

While these guidelines are in direct opposition to the regulations by the Financial Crimes Enforcement Network (FinCEN), it is consistent with IRS regulations on “gold, silver, stamps, coins, gems, etc., These are capital assets except when they are held for sale by a dealer. Any gain or loss you have from their sale or trade generally is a capital gain or loss.” There are now conflicting federal regulations in regards to Bitcoin and other cryptocurrencies; one regulatory agency claiming Bitcoin is a form of money, and another claiming Bitcoin is property. Aside from being confusing to businesses that may consider using Bitcoin in some capacity, this creates an internal conflict with FinCEN, which does not require precious metals dealers to register as money transmitters.

The official IRS regulations have not actually been written, and no one know when the IRS will release actual regulations, as opposed to guidelines, on Bitcoin. However, as Tyson Cross points out, “Tax professionals can then identify issues and advocate possible solutions. So between now and the issuance of actual regulations (which takes years), there’s ample opportunity to shape the tax treatment.” It is also possible that the IRS is intentionally creating a regulatory conflict to allow the courts to determine how Bitcoin should be treated from a legal perspective. In the meantime, I don’t foresee very many people who use Bitcoin actually complying with any IRS regulations when it comes to reporting any supposed capital gains.

posted by southernpatriot
  • BC3030

    I find it funny that so many government agencies have no clue how to regulate something they can’t physically control.

    Meanwhile online merchant gateways are steadily accepting it as a payment option in order not to be last on the bandwagon.

    The real tidal shift will be when a federal agency (probably the FBI) has to account for what they’ve seized from those alleged money laundering schemes, and tries to change it back into dollars as part of an asset forfeiture case.