In spring 2014, the IRS issued Notice 2014-21, initial guidance on the tax treatment of virtual currency such as Bitcoin, from mining to its general use. The IRS explained convertible virtual currency is to be treated as property.
Thus, for example, if I use virtual currency X with a basis of $5 (because I obtained it a while back for $5) to buy a jacket today that is selling for $100, I have a $95 gain on the use of my virtual currency. To know if it is a capital gain or ordinary income, I apply the normal property. If I’m holding this virtual currency for investment or personal use, it is a capital asset. If I’ve owned it longer than one year, I have a $95 long-term capital gain. I also have a bit of record-keeping to handle.
Also, before I leave that example, if I instead had a $95 loss, one issue is whether the virtual currency is an investment asset (loss is a usable capital loss) or a personal use asset (I can ever use the loss). This isn’t really one for the IRS. The answer exists today with all types of assets, such as what one might call their art collection (investment or personal use asset?).
Issues with Virtual Currency
The American Institute of CPAs (AICPA) recently sent a comment letter to IRS listing and explaining ten areas where additional guidance is needed (I was involved in the drafting). I think these are ten issues that could easily come up in preparation of a return and IRS examination of a return. I encourage you to take a look at the letter for all ten of the topics. I’ll just note two.
1. Is it permissible to get like-kind exchange treatment if, for example, bitcoin is exchanged for litecoin? I think the answer is yes, assuming the currency is held for business or investment use. Arguably, the currencies are similar in technology and usage. We asked the IRS to clarify this topic and to note any factors they would consider pertinent in identifying if currencies are like kind.
2. How is virtual currency held by a merchant for paying bills and having transactions with customers treated? Is it considered inventory? Is the barter treatment of virtual currency mean that the merchant is also selling the virtual currency (in addition to its goods and services)? Is this property used in the trade or business with a life longer than one year? (if yes, it would depreciate which seems odd)
The IRS has a lot of projects on their agenda. Hopefully additional guidance on virtual currency will be one of them.
What do you think?
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.
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