So, begins T.S. Eliot’s masterpiece The Waste Land. While the poet wasn’t referring to the U.S. tax season, it fits. And there is something extraordinarily cruel, crazy even, in the IRS’s approach to the tax treatment of virtual currencies.
The blockchain has the power to promote the general welfare and secure the blessings of liberty to ourselves and our posterity. Those objectives just so happen to be two of the six purposes of the American government as laid out in the preamble to the Constitution.
So, it’s awkward that the IRS, an agency of the federal government, adopted an interpretation of the tax law that severely inhibits the achievement of these ends.
The problem? In 2014, the IRS determined that it would treat “convertible virtual currency,” such as bitcoin, as property. That decision subjects it to capital gain (or loss) and investment income tax treatment and associated reporting requirements.
What does this mean? Every time you pay your DISH Network bill, make an Overstock.com purchase, or book a hotel on Expedia using bitcoin, the IRS requires you to record the amount, allocate your cost basis in the satoshi (or ether, or what have you) to make the purchase, subtract the cost basis from the price, and report the difference to the IRS while calculating the capital (long or short term, depending on when you bought that one) gain or loss on your tax return.
And pay a tax, if it’s a gain.
That’s a prohibitive quagmire when selecting a payment method. It’s not just prohibitive. It’s crazy.
Stepping back, this is symptomatic of a broader problem with Washington’s disjointed approach to the technology.
“The breakthrough distributed ledger technology known as the blockchain is being given the ‘Mad Hatter’ treatment by the federal government.
The U.S. Commodity Futures Trading Commission is eyeing virtual currency as a commodity. The SEC is beginning to treat certain tokens as a security. The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has stated that certain activities involving convertible virtual currency constitute money transmission. The IRS treats convertible virtual currency as property.
Commodity? Security? Currency? Property?
Four different, inconsistent categories for the same thing.”
Both the IRS and FinCEN are agencies of the U.S. Treasury yet they have taken wildly differing approaches. Coherence lies in treating virtual currencies as an alternative to government-issued currency for tax purposes.
That’s our tax policy position, and ithas the support of the blockchain sector. We developed it in consultation with some of the most respected economic policy experts in the world and after nine months of consultation with many of the more than 160 Chamber members.
Central banks around the world are exploring the concept of central bank-issued digital currency. How can something that is treated as a currency by a central bank be considered property?
Watchdog weighs in
Meanwhile, the IRS is on shaky ground. The Treasury’s own Inspector General issued a detailed report in 2016 criticizing the agency’s stand:
“It does not appear that any of the actions already taken by the IRS to address virtual currency tax noncompliance were coordinated to ensure that the IRS maintains a strategic approach to the tax implications of virtual currencies.”
Further, the Inspector General observed:
“For example, if a taxpayer uses a portion of a bitcoin to buy a cup of coffee each day for one week, he or she will have to determine what portion of the bitcoin was used to make the purchase based on the daily exchange rate, convert it into U.S. dollars, and keep a record of each transaction so that the gain or loss from his or her virtual currency property can be properly reported. [The IRS’ property guidance] does not provide taxpayers with guidance on what records should be kept and how the records should be maintained. Due to the potential complexity of reporting otherwise simple retail purchase transactions related to virtual currencies, further guidance is needed to help taxpayers voluntarily comply with their tax obligations.”
Years later, the IRS has yet to provide such guidance.
To add insult to injury, the IRS issued a “‘John Doe’ summons” to popular exchange Coinbase for the records of half a million bitcoin owners, demanding access to enormous amounts of customer data.
The IRS’s demand provoked criticism from powerful Congressional officials, House Ways and Means Committee Chairman Kevin Brady and Senate Finance Committee Chairman Orrin Hatch. In the face of that and other criticism, the IRS drastically reduced the scope of its demand. Still, this kind of fishing expedition is onerous and scuttles the path to adoption of this technology.
Our policy team is active on Capitol Hill educating Members of Congress and staff on the imperative need for the federal government to have a coherent approach to the blockchain, not a patchwork of contradictory approaches.
The Congressional Joint Economic Committee recently devoted an entire chapter of its annual report to the blockchain, citing our work and recommending: “Regulators should continue to coordinate among each other to guarantee coherent policy frameworks, definitions, and jurisdiction.” Among the most important elements of such coordination is tax treatment.
April, the cruelest month? Quite possibly. Congress should treat virtual currency as an alternative to government-issued currency, giving consumers choice, and expressly exempt convertible virtual currency transactions from investment and capital gains treatment and associated reporting requirements.