Bitcoin Tax Update

This is a guest post from Alan Duncan, CPA, controller at RCP.

by Alan Duncan, CPA

Previously, we took a look at the rising use of virtual currency and the recently released view of the IRS in addressing proper accounting treatment. Now we will revisit this topic and check in on the latest developments and related accounting treatments.

In June, the American Institute of CPAs sent a letter to the IRS requesting clarification on ten virtual currency issues:

  1. Acceptable valuation and documentation
  2. Expenses of obtaining virtual currency
  3. Challenges with specific identification for computing gains and losses
  4. General guidance regarding property transaction rules
  5. Nature of virtual currency held by a merchant
  6. Charitable contributions
  7. Virtual currency as a “commodity”
  8. Need for a De Minimis election
  9. Retirement accounts
  10. Foreign reporting requirements for virtual currency.

In 2014, the IRS released guidance in Notice 2014-21, which answered initial questions about the treatment of virtual currency. Since then, the topic has continued to grow aggressively.  For comparison, the average daily Bitcoin transactions in 2014 were somewhere in the range of 60,000; now in 2016, volume has grown to 220,000. This is nearly a 300% increase in just two years.

With respect to the AICPA’s letter, one of the interesting points to watch will be the IRS response to foreign reporting requirements for virtual currency.  With the inherent nature of Bitcoin and similar virtual currency, the “money” exists only online, is not regulated by any governing body, and does not appear to currently have any centralization upon which the basis for a foreign transaction could be established.  While this point does not necessarily mean it would be impossible to determine a foreign transaction, it would almost certainly complicate the matter.

Bitcoin acceptance has hit the mainstream in the recent past with web retailer and the Sacramento Kings NBA franchise (and possibly more to come) announcing their acceptance of Bitcoin.  We are seeing the convenience factor improving with the availability of Bitcoin ATMs on the rise as well.  Places such as Purse are offering purchase discounts to those paying with Bitcoin.

However, as transactions continue, we are beginning to hear reports of the IRS conducting audits of individuals holding Bitcoin.  It is reasonable to have confidence that the topic is on the radar with the IRS and at some point in the near future we could see a revised update addressing the points in the AICPA’s recent letter.  Until further regulation is released, we still look to Notice 2014-21 for guidance on directing us to treat virtual currency as property rather than currency and account for accordingly.