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AICPA to IRS: we need guidance on virtual currencies

GettyImages-678790644More and more people are investing in virtual currencies (also known as “cryptocurrencies”), such as Bitcoin. A recent study says that one in ten Americans owns some kind of virtual currency. Given this rise in popularity, tax preparers need to ask their clients whether they own or trade any virtual currency.

The first thing tax preparers wants to know is, “what is virtual currency and how is it taxed?”  Most people do not know the answer to this question, and they’re not alone. The AICPA has developed multiple comment letters on this issue because we hear from our members across the country that virtual currency is an emerging area they want to understand and learn more about. 

Virtual currency is like a traditional currency because it can be used for buying and selling and as a store of value.  But, unlike traditional currencies, it is not backed by any sovereign government.  There are over 1,600 virtual currencies today, including well-known ones such as Bitcoin, Litecoin, Ethereum and Ripple. 

IRS Notice 2014-21 tells us that virtual currency that is convertible into cash is treated for tax purposes as property, rather than as a foreign currency. Thus, if you acquire virtual currency X for $10 and use it 15 months later to buy $50 of clothes, you have a bartering transaction.  You report the $40 gain on your virtual currency as long-term capital gain. If your employer pays you in bitcoin, it’s taxable just as if it were cash or other property.

The tax treatment can change based on how the virtual currency is acquired. For example, Bitcoin can be mined, which means having powerful computers solve equations with the reward of unlocking some Bitcoin. Virtual currency obtained by mining is taxed as ordinary income. If mining is someone’s business, self-employment taxes are owed. You can also use a money exchanger to provide the Bitcoin in exchange for your cash or perhaps a different virtual currency.  You might hold that Bitcoin in a wallet which helps you track, use and secure your virtual currency.  Other acquisition techniques also exist.

Since the release of the IRS Notice 2014-21 in 2014, the rapid emergence of virtual currency has generated several new questions on how the tax rules apply to various transactions involving virtual currency and activities and assets related to it.  The increase in the number of types of virtual currencies and the value of these currencies make these new questions both timely and relevant to a growing number of taxpayers and tax practitioners.

While the IRS has asked practitioners where additional guidance is needed in this area, it hasn’t issued any more rules. In March 2018, the IRS issued news release 2018-71 reminding taxpayers to report virtual currency transactions.  It included some dire warnings, but none of the additional guidance that tax preparers and taxpayers anxiously seek.

In response, the AICPA Virtual Currency Task Force developed 27 FAQs to provide our updated recommendations on virtual currency guidance for practitioners.  Our FAQs include both the questions and our suggested answers to those questions.  We asked that the IRS release immediate guidance regarding the tax treatment of virtual currency transactions.  Specifically, we requested additional guidance that will address new issues that are relevant to the 2017 tax year, such as chain splits, that arose after the release of the original IRS notice.

Our suggested FAQs address the following areas:

  1. Expenses of Obtaining Virtual Currency
  2. Acceptable Valuation and Documentation
  3. Computation of Gains and Losses
  4. Need for a De Minimis Election
  5. Valuation for Charitable Contribution Purposes
  6. Virtual Currency Events
  7. Virtual Currency Held and Used by a Dealer
  8. Traders and Dealers of Virtual Currency
  9. Treatment under Section 1031
  10. Treatment under Section 453
  11. Holding Virtual Currency in a Retirement Account
  12. Foreign Reporting Requirements for Virtual Currency

Included in our FAQs is a request for the IRS to provide guidance on what special documentation rules or requirements apply given the decentralized nature of virtual currencies and the various ways these currencies are held and transferred.

Taxpayers are increasingly engaging in virtual currency transactions, which, add a new layer of complexity to the analysis of a client’s reporting requirements.  Clear guidance in this area is needed to provide confidence and clarity to preparers and taxpayers on application of the tax law to virtual currency transactions.

The AICPA continues to talk with officials at the Department of Treasury and IRS, providing input on the questions our members have and suggesting areas that Treasury and IRS should address.  And our committees, panels and task forces will remain extensively engaged in the regulatory process.  For more information, you can watch our video on this topic and be sure to check our AICPA Tax Policy & Advocacy webpage for more updates.

Amy Wang, Senior Manager, Tax Advocacy, Association of International Certified Professional Accountants

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