Yesterday, the United States Internal Revenue Service (IRS), a bureau of the Department of the Treasury, published guidance on how digital currencies like Bitcoin should be treated by Americans for tax reporting purposes. In short, the IRS determined that digital currencies should be treated as property, not as currency, regardless of the way in which they are used.
The Bitcoin Foundation appreciates the IRS’ hard work in providing much-needed clarity to those transacting in digital currencies. The digital currency industry has, on the whole, welcomed greater regulatory clarity for its ability to foster innovation in this critical and emerging space.
However, tax treatment of Bitcoin as a property, and not a currency, may make compliance with tax laws unnecessarily cumbersome and imposes untenable recording and reporting requirements on its users. This is an unwelcome result for most bitcoin users, but is particularly detrimental to those that Bitcoin can help the most: small business and underbanked individuals. When it is used as a currency, Bitcoin should be a frictionless means of paying for goods and services. The tax laws currently permit individuals to ignore small gains and losses in foreign currencies. Similar treatment for digital currencies would harmonize the law with the way most people actually use digital currencies. Artificially characterizing this use case as a transaction in property would make one of the most innovative features of this technology hard to use for those who wish to be compliant.
While the Bitcoin Foundation welcomes greater clarity in the regulatory treatment of the many uses for the Bitcoin protocol, IRS’ approach to developing this guidance was not an inclusive one. IRS did not, in particular, seek meaningful input from the digital currency industry or the public at large. As a result, the guidance creates a poor framework for innovation. To the extent that the tax code compelled this unwieldy outcome, a more open process would have identified the limitations of the statutory language and facilitated a dialogue between IRS and the appropriate legislators to address those limitations.
The Bitcoin Foundation welcomes the opportunity to provide more formal comment to IRS in the coming weeks.
The official notice from the IRS can be found here.
Further details, including FAQ, can be found in Notice 2014-21.