The Internal Revenue Service recently issued their guidelines as far as how Bitcoin and the other virtual currencies fit into the scheme of the American tax structure. But the American Institute of CPAs (AICPA) still has plenty of questions about how this new form of money should be treated for tax purposes.
The idea of virtual currency – devised to freely pay for goods and services through the Internet and across all borders – challenges economies worldwide as they attempt to integrate virtual currency into rules written for paper currency systems. The European Central Bank defines virtual currency as ”a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community."
Bitcoin has a slightly different take on the concept of virtual currency, however.
“Bitcoin isn’t owned by anyone. Think of it like email. Anyone can use it, but there isn’t a single company that is in charge of it. Bitcoin transactions are irreversible. This means that no one, including banks, or governments can block you from sending or receiving bitcoins with anyone else, anywhere in the world. With this freedom comes the great responsibility of not having any central authority to complain to if something goes wrong” (Bitcoin.com).
So how does an invisible currency that isn’t owned by anyone translate into a tax system with roots at the beginning of the previous century? The IRS made a start with its directions in Notice 2014-21. And while the AICPA applauded the initial steps by the IRS to define how such digital money should be treated, the organization still sees some murky areas. So they’ve written a letter to IRS Commissioner John Koskinen seeking some answers.
Could You Elaborate?
The initial IRS guidance came in the form of answers to frequently asked questions (FAQs) about digital currency. It recommends taxpayers use “a reasonable manner that is consistently applied” to calculate the fair market value of digital currency. The AICPA letter to the IRS asks just what “reasonable manner” means exactly.
Also, different virtual currency exchanges list different values for the same virtual currency at the same time, so which value is used for tax purposes?
Another area of confusion comes from the cost of acquiring virtual currency. Particularly, the AICPA wants to know when, if ever, any costs of acquiring virtual currency are capitalized.
AICPA sees confusion in calculating gain or loss using virtual currency, since, “in many cases, it is impossible for a taxpayer to track which specific virtual currency was used for a particular transaction.”
And if a donation of virtual currency above $5,000 is made to a qualified charity, does it fall under the rule requiring a qualified appraisal of the donation? And again, how should the donation value be documented?
Direction is also sought on whether virtual currency is considered a commodity that’s subject to mark-to-market accounting. That’s an issue that’s also being examined by the Commodity Futures Trading Commission, according to the AICPA.
The AICPA’s letter stresses that as the use of virtual currencies expands, reporting a client’s income and tax responsibilities becomes more difficult. “The issuance of clear guidance in this area will not only reduce the confusion and burden for tax preparers, but also will allow taxpayers to accurately comply with IRS rules,” says the letter.