-‘Taxation and Policing of the Virtual Currency World’ – March 18, 2018 David R. Natan
While the virtual currency craze and price volatility roller coaster may have caught many by surprise over the last six months, the IRS has been planting seeds since 2014 in an attempt to police this virtual world. In March of 2014 the IRS released Notice 2014-21 where they essentially clarified that virtual currency is treated as property. The character of gain or loss from the sale or exchange of virtual currency is that of a capital asset subject to short-term and long-term capital gains. In addition, using the currency to make a direct purchase of goods or services even through a platform that accepts results in a taxable event. The Notice also addressed the use of the currency as payment for services subject to 1099 and W-2 reporting.
Fast forward to today where we now have 1,564 virtual currencies that make up a total market cap of $311,232,945,832, While Bitcoin leads the way in size, the largest currency platform Coinbase has been taking the most heat from a reporting perspective. In November of 2017 a judgement resulted in Coinbase having to report the personal data of 14,355 account holders who transacted, bought or sold more than $20,000 between 2013 and 2015.
Further, many Coinbase customers have been issued surprise form 1099-Ks covering 2017 activity. Coinbase explains that it files 1099-K for customers who have received cash above the required reporting threshold, which is more than 200 receipt transactions or greater than $20,000 during the year. Coinbase stated that: “We used the best data available to us to determine whether your account activity qualifies as Business Use, including but not limited to factors such as completion of a merchant profile or enabling merchant tools.” It should be noted “business use” under the 1099-K is essentially meant for individuals or entities who received payments in exchange for the provision of goods and services (not electronic wallet transfers or mining proceeds).
Treatment of exchanges/trades of one form of virtual currency for another (for example BitCoin for Ether) for 2017 and earlier is not entirely clear. While the consensus appears to lean towards exemption from tax or falling under the like kind exchange rules, the position is not entirely clear. Under the new tax reform, however, the position is a bit clearer, as these trades will be subject to taxation. Further, to date, FinCen Form 114 foreign reporting rules do not impact virtual currency.
While the virtual currency landscape continues to evolve, it is important that taxpayers are mindful to track and monitor their transactions. Basis tracking and lot identification will become very important as the IRS and other agencies look to tighten policing of the virtual currency world.