How Should A Virtual Currency Exclusion Work?

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Written by Annette Nellen | Posted in Virtual Currency Exclusion

How Should A Virtual Currency Exclusion Work?

A frequent proposal for taxation of virtual currency is to add an exclusion similar to IRC section 988(e) for gain “by reason of changes in exchange rates after such currency” for personal transactions. This is a simplification measure as not records need to be kept such as when one is traveling and using a foreign currency. It is likely infrequent that the conversion gain exceeds $200.

H.R. 6582 (117th Congress), Virtual Currency Tax Fairness Act of 2022, would add section 139J to not include gain up to $200 due to changes in exchange rates, from disposition of virtual currency in a personal transaction (defined per section 988(e)). [also see rationale from the sponsors]

In contrast, the Responsible Financial Innovation Act, introduced by Senators Lummis and Gillibrand in June includes a different version of section 139J. This version says no gains or losses of $200 or less are recognized from the sale or exchange of virtual currency in a personal transaction for goods and services. If the gain or loss is from an exchange of one virtual currency for another and the gain or loss is $200 or less, this exclusion does not apply. [see page 11 of the bill + see sponsor explanation of the entire bill]

So, which is the better version?

I think it is the Lummis/Gillibrand version. If the purpose of any exclusion is simplification, it should apply to gains and losses. Otherwise, the individual needs to track records for transactions to see if a loss was generated to be recognized, defeating simplification. Of course, if the virtual currency is only used for personal transactions without any investment intent, the loss of any amount would not be allowed.

And I think the exclusion should only apply when the virtual currency is used to acquire personal goods and services (as with the Lummis-Gillibrand bill). If the virtual currency is used to acquire another virtual currency, it likely is for investment and all records of gains and losses need to be kept.

What do you think? Annette Nellen

Annette Nellen

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.