Dear IRS, How About An Update on That Bitcoin Notice?

  • Nancy Miller
  • August 12, 2016
  • 1

© Can Stock Photo Inc. / BackyardProductTwo years ago the IRS issued a brief notice on the status of bitcoin and all its digital cousins stating that for tax purposes these items are property — not currency.

Shortly before the March notice was published, bitcoin had awoken from a stupor, zooming from well under a $100, and nearly hitting $1000, according to data from CoinDesk. An adult clearly needed to intervene.

Two years later, and a lot of price gyrations later, the IRS has had nothing further to say on this matter — although the six-page notice left a lot of questions unanswered. (Most tax code documents run into hundreds of pages!) Finally, the American Institute of CPAs sent a letter in June asking for clarification in 10 areas: How do you account for an individual who buys a cup of coffee with appreciated bitcoin? How do you account for mining bitcoin costs? And so forth.

There’s something quite languorous about this exchange across the years. Between the IRS notice and the AICPA letter so much has happened: Bitcoin exchanges have imploded, scams have exploded, and in Florida, an undercover cryptocurrency sting got a finger-wagging from a state judge that would make Olympic gold medalist Lilly King proud.

Detective Ricardo Arias had sought out a bitcoin seller on Craigslist because he thought the currency was ripe for crime. He found Michell Abner Espinoza, a bitcoin purveyor who would only meet in a public place to make a cash trade. After a couple of meetings, Arias told Espinoza he was using the currency to buy stolen credit card data. Then he cuffed Espinoza on charges of illegal money transmission and money laundering.

Florida Judge Teresa Poole wasn’t having any of it:

This Court is not an expert in economics, however, it is very clear, even to someone with limited knowledge in the area, that Bitcoin has a long way to go before it is the equivalent of money.

So much for illegal money transmission. As for the money laundering charge, Poole tossed that out as well:

This Court is unwilling to punish a man for selling his property to another, when his actions fall under a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning.

The judge respectfully asked the Florida legislature to get its act together.

Ferguson Hodgson, a research fellow at the Tax Revolution Institute, would ask the same of the IRS. Its silence over the past two years reveals just how “archaic, complicated, and tyrannical” the U.S. tax code is. The IRS has created a ruling that is impossible to comply with, he said in an interview. “You are automatically a criminal” by engaging in bitcoin transactions. On the bright side, the digital currency provides an opportunity for civil disobedience. “The tax system is antithetical to common sense.”

Hodgson had contacted the IRS to get clarification on the two-year-old notice and said even the people responsible for interpreting the missive couldn’t do it.

There are those who believe the go-slow approach is appropriate. Bitcoin once dominated the headlines but now it’s wall-to-wall blockchain — which isn’t deployed only for currency. Bob Derber, a corporate tax attorney at Summit Legal Group, wrote in a blog post last year that the slow motion reaction by regulatory authorities is healthy:

Historically, a cautious approach to the taxation of new intangible assets by the IRS is typical.  Software technologies are dynamic, and their development, categorization, use and transfer permit only “best guess” tax treatment until a level of technological maturity is reached.  For example, the tax principles initially applied to mainframe software were challenged by the emergence of the personal computer. They were challenged once again as the internet emerged.

In the great American spirit, others are finding a way to make money off this soup of vagueness. A startup called Libra created software to track digital currency transactions in anticipation of each and every tax consequence — whatever it may be. Libra just announced a joint business relationship with PwC Australia. And, appropriately enough, Australia may be prepared to take a much stronger stand on cryptocurrency: It has issued a proposal regulating digital currencies under money laundering and anti-terrorism laws. Guess how many people are happy about that.

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