AICPA Recommends More Guidance on Virtual Currency Taxation
The American Institute of Certified Public Accountants (AICPA) recently sent a letter to the Internal Revenue Service recommending that the IRS issue additional guidance on transactions using virtual currency, such as Bitcoin.
In 2014 the IRS published Notice 2014-21 which provided basic guidance in taxation of virtual currency transactions. The guidance was in the format of 16 FAQs that addressed a range of issues, including:
- Virtual currency is treated as property rather than as currency.
- Transactions in virtual currency must be reported in U.S. dollars at their fair market value as of the date of payment or receipt.
- Based on the nature of transactions in virtual currency, they may be characterized as salaries or wages, self-employment income, miscellaneous income or income from the sale of a capital asset. As such, they are subject to withholding and tax payment rules just like they were cash transactions.
The AICPA noted that since Notice 2014-21 was issued, the number of types of currency has grown and usage has become more prevalent. New questions have emerged regarding the application of tax rules for virtual currency transactions.
The AICPA has requested that the IRS expand its 16 FAQs to address additional issues, including:
- Valuation: There are numerous issues regarding valuation. For example, virtual currency values can vary greatly on different exchanges.
- Gains and losses: There are different tax effects for short-term gains or losses versus long-term. Identifying the holding period of virtual currency can impact the characterization of the type of gain or loss in a sale or exchange transaction.
- De minimis rule: Should there be a floor (say $200) under which virtual currency transactions would not need to be reported or records maintained?
- Other topics include valuation of charitable contributions, virtual currency dealers and traders, retirement accounts, and foreign currency requirements.