Seeking to make it simpler for individuals to use virtual currency in their daily lives, two members of Congress have introduced a bill that would provide a de minimis exemption for personal transactions where the gains are less than or equal to $200.
The everyday use of virtual currency is "near impossible," Reps. Suzan DelBene, D-Wash., and David Schweikert, R-Ariz., assert, because the IRS treats virtual currency for tax purposes as property, not legal tender. Currently, a person who uses a currency such as bitcoin to make a purchase, even as small as a cup of coffee, is taxed on the gain realized from the bitcoin's appreciation in value.
The two lawmakers introduced the Virtual Currency Tax Fairness Act (H.R. 5635) in January 2020 in the belief that the IRS is inhibiting innovation and the growth of the digital economy as a result of its tax treatment of virtual currency. According to DelBene's press release about the proposed bill, the IRS's current guidance does not sufficiently consider virtual currency's "potential for use in our daily lives, instead providing rules that are best applied to investments" in digital coins.
Because virtual currency has evolved, DelBene said, and people are using the new medium of exchange in myriad ways, we must "evolve our understanding of virtual currency in the tax code, allowing people to use virtual currency in their daily lives."
Schweikert referred to the importance of "fair treatment of virtual currencies in our tax code" and said that small dollar transactions should be allowed to occur "without additional friction."
Under DelBene and Schweikert's bill, if the gain that a virtual currency-using taxpayer realizes in a personal transaction "by reason of changes in exchange rates" is no more than $200, the gain is excluded from gross income. The legislation would also direct Treasury to issue regulations for reporting personal transactions in virtual currency where gains exceed $200.
More and more merchants are allowing customers to pay with virtual currency, including numerous major retailers. Meanwhile, the IRS has singled out unreported cryptocurrency transactions for heightened enforcement.
The AICPA supports a $200 de minimis exception and has urged the IRS to issue guidance adopting such a rule (see May 30, 2018, comment letter from the chair of the AICPA Tax Executive Committee to the IRS).
The taxation of virtual currency transactions
The IRS treats virtual currencies, such as bitcoin, as property rather than as currency, and says that general tax principles for property transactions apply to transactions using virtual currency.
The Service adopted this approach in Notice 2014-21, which contained answers to 16 frequently asked questions. The Service expanded the FAQs in 2019. There are now 45 FAQs, which are the Service's main (but nonauthoritative) guidance on the taxation of transactions involving virtual currency.
The scope of the FAQs is limited to "convertible" virtual currencies, meaning ones that have an equivalent value in real currency or act as a substitute for real currency. An example is bitcoin. (Examples of nonconvertible virtual currencies include some used in multiplayer online video games. On Feb. 14, the IRS released a statement on its website that virtual currencies that do not leave the video game environment do not have to be reported because they are not convertible, see article here.)
Simultaneously with posting the 2019 FAQs, the IRS issued Rev. Rul. 2019-24 to address "hard forks" and "airdrops" of a cryptocurrency (see Bonner, "Guidance Explains Tax Treatment of Cryptocurrency Airdrops and Hard Forks," 51 The Tax Adviser 6 (January 2020).
Recent GAO report
The U.S. Government Accountability Office recommended recently that the IRS should include a disclaimer with the 2019 FAQs to inform taxpayers not to rely on them as authoritative, on the ground that the FAQs were not published in the Internal Revenue Bulletin (GAO, Virtual Currencies: Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance (GAO-20-188) (Feb. 12, 2020)).
The February 2020 GAO report also made two other recommendations: first, that the IRS take steps "to increase information reporting," and, second, that the IRS and the Financial Crimes Enforcement Network "address how foreign asset reporting laws apply to virtual currency." The GAO summarized the agencies' responses to its recommendations:
IRS agreed with the recommendation on information reporting and disagreed with the other two, stating that a disclaimer statement is unnecessary and that it is premature to address virtual currency foreign reporting. GAO believes a disclaimer would increase transparency and that IRS can clarify foreign reporting without waiting for future developments in the industry. FinCEN agreed with GAO's recommendation.
— Dave Strausfeld, J.D. is a Tax Adviser senior editor. To comment on this article or suggest an idea for another article, contact him at David.Strausfeld@aicpa-cima.com.