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US Accountants Seek Virtual Currency Tax Guidance

by Mike Godfrey, Tax-News.com, Washington

16 June 2016


On June 10, the American Institute of Certified Public Accountants (AICPA) wrote a letter to the Internal Revenue Service (IRS) urging it to provide additional guidance on how the existing US tax code should apply to virtual currency transactions.

"Virtual currency transactions, in which taxpayers increasingly engage, add a new layer of complexity to the analysis of a client's reporting requirements," wrote Troy Lewis, Chair of the AICPA's Tax Executive Committee. "The issuance of clear guidance in this area will not only reduce the confusion and burden for tax preparers, but also allow taxpayers to accurately comply with IRS rules."

Lewis noted that the IRS had worked "expeditiously" to release guidance regarding the tax treatment of virtual currency transactions in its Notice 2014-21, which was issued in April 2014. The IRS had then decided, as Bitcoin and other digital currencies do not have legal tender status in any jurisdiction, they should be treated as property for US federal tax purposes, and, therefore, the general tax principles that apply to property transactions also apply to transactions using virtual currency.

This meant, for example, that wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2 (Wage and Tax Statement), and are subject to federal income tax withholding and payroll taxes. In addition, payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply.

In his letter, however, Lewis listed several areas in which additional guidance is requested on "major issues" not addressed in the IRS's previous Notice. These topics include the valuation calculations acceptable to the IRS on virtual currency exchanges; the treatment of expenses incurred in obtaining virtual currency; and an allowance for alternative methods in identifying capital gains and losses.

In addition, AICPA requested further details on the applicable tax rules regarding the treatment of virtual currency transactions as property transactions; clarification as to whether virtual currencies held by a merchant for use in paying employees and suppliers are capital or trading assets; the valuation of virtual currency charitable contributions; and a decision on whether virtual currencies are considered a "commodity" subject to mark-to-market accounting.

Finally, the letter talked of the need for a de minimis exclusion (such as is already available for foreign currency exchange rate gains); a decision whether retirement savings accounts are permitted to hold virtual currency investments; and an indication whether there are foreign reporting requirements for virtual currencies in future tax years, such as the provision of a Report of Foreign Bank and Financial Accounts (FBAR) and obligations under the Foreign Account Tax Compliance Act (FATCA).

TAGS: compliance | tax | investment | tax compliance | revenue guidance | Internal Revenue Service (IRS) | tax authority | United States | currency | alternative investment | Tax

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