Will they change Bitcoin Tax Regulations?
In terms of Bitcoin tax regulations, the U.S. government moved a step closer to designating the cryptocurrency as cash when Comptroller of the Currency Director Keith Noreika stongly hinted that his office would soon regulate it in the United States.
Mr. Noreika made the comments during an event at the Philadelphia Fed. The former banking lawyer told attendees that he would endorse a plan that included fintech charters which helped Bitcoin brokers do business across state lines. Thomas Curry, Mr. Noreika’s predecessor, first announced plans for a similar scheme about a year ago, so the news is not exactly new, but it clearly indicates that things are still moving in that direction. Generally, Bitcoin industry insiders look forward to additional Bitcoin tax regulation, so they can avoid a web of different state laws.
Rather ironically, Congress established the Comptroller of the Currency in 1863 to stamp out the state currencies which were emerging at the time.
Current Bitcoin Tax Regulation Law
It took a while, but the IRS finally released something in writing that backs up an analyst’s position on Bitcoin and other forms of cryptocurrency. From reading the preambles of Notice 2014-21, it looks for all the world as if the IRS will designate bitcoin as cash, since ” it operates like ‘real’ currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance.”
But in the FAQ section, the Bitcoin regulation notice aburpty changes course and declares that cryptocurrency is property for income tax purposes. Additionally, according to the Notice, “virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes,” a declaration that will probably make a lot of foreign account holders breathe a bit easier.
Then, things get a little more interesting. The Service states that Bitcoin’s tax basis is its fair market value on the date the taxpayer acquired it, as payment for a good or service or otherwise. The IRS released this notice when Bitcoin was essentially worthless, and now that it is trading at over $4,000 a share, a lot of Bitcoin holders are in line for a substantial windfall. For those just tuning in, the IRS abhorrs the w-word and it has been known to take extreme measures to eliminate these windfalls.
In short, the Bitcoin pie is a lot jucier now than it was in 2016, and the government is clearly angling to get a slice.
Some Bitcoin Tax Tips
As with any other property, every Bitcoin transaction involves acquiring the property, usually by exchanging cash for it, holding the property for a period of time, and then disposing of the property by selling it, giving it away, donating it, or whatever. Since property transactions are inherently complex, here are some good Bitcoin tax tips:
- Keep complete records, since incomplete Bitcoin or other investment records might as well be no records at all. There are a number of available software platforms to assist in this task, including BitcoinTaxes, LibraTax, and some versions of Quickbooks.
- Record all Bitcoin dispositions, including expenses and implied dispositions, on Form 8949.
- Many of the currency rules, such as backup withholding, also apply to Bitcoin transactions. Businesses must pay dollars to comply, even if the employee receives Bitcoin.
- Identify one exchange rate and stick with it.
Current Bitcoin tax regulations require holders to pay a capital gains tax as well as a 3.8 percent investment income tax.
As always, if you have any questions or receive any notices from the IRS, reach out to a tax attorney straightaway before a manageable problem becomes unmanageable.