Bitcoin: Property or Currency?

JurisdictionUnited States,Federal
AuthorBy Greg Zbylut and Paul McCullum
CitationVol. 25 No. 1
Publication year2016
Bitcoin: Property or Currency?1

By Greg Zbylut and Paul McCullum2


In 2009, a novel and disruptive financial instrument arrived in the digital era - Bitcoin. Bitcoin is a virtual or digital currency, sometimes called a crypto-currency.

This piece discusses some of the limitations and problems with current treatment of Bitcoin for tax purposes as property and proposes that Bitcoin and virtual currencies be treated as currencies for tax purposes. Property treatment is troublesome and incongruent for a digital mode of payment. Property treatment requires cumbersome and onerous record-keeping requirements for a technology used to pay for goods and services. This requires unduly burdensome calculation of capital gains and losses for simple transactions, and applies punitive loss limitations. Additionally, property treatment allows for taxpayer gaming, including risk of price manipulation to minimize tax burdens and the potential for wash sales.

Property treatment acts as a stifling mechanism for a revolutionary digital financial technology in an era when most wealth holdings and transfers have already become digital. Bitcoin is a disruptive technology to commerce that allows instantaneous, reliable, and low-cost transfers the world over, supported by a trusted public ledger, with no middle-man or intermediary.

The proper tax treatment for Bitcoin and other digital currencies is as a foreign currency. Bitcoin is called a currency, was developed as a currency, and is increasingly used as currency. Bitcoin is a modern currency with increasing acceptance among merchants and consumers.

Bitcoin has often been referred to as the "Internet of money," although it is not without its criticisms. Criticisms include that it is not a fiat currency, it is intangible and unregulated, holds no intrinsic value, is insecure, and is volatile. Many of these criticisms are overblown or outright specious. Bitcoin should rightfully be held under intense scrutiny, as any novel technology should, especially one that is an altogether disruptive mode of transacting commerce. However, Bitcoin is increasingly used to pay for goods and services. It offers a safe, fast, reliable, cheap and effective means to transfer payment. The Internal Revenue Service ("IRS") ought to treat Bitcoin in the manner it is increasingly used as, a currency.


Bitcoin, a virtual currency created in 2009 by an individual or group using the alias Satoshi Nakamoto, is based on a decentralized peer-to-peer system. Transactions are made with no intermediary. There are no banks involved, little to no transaction fees, and transactions are almost instantaneous. Network nodes verify transactions, and the network uses a public ledger called the "block chain" to record transactions. There is no central repository or administrator. The United States Treasury categorizes it as a decentralized virtual currency.3

As public acceptance increases, the number of merchants willing to accept Bitcoin as a form of payment also increases. But, even though the general public is slowly embracing Bitcoin as a form of payment (thus giving it characteristics of a currency), public officials continue to struggle with the question of whether Bitcoin is a currency, and therefore subject to appropriate currency regulations, or if it is simply property, making transactions in Bitcoin more akin to barter.

II. BITCOIN IS PROPERTY . . . A. The Current Position

The current position of the IRS, outlined in Notice 201421, is that Bitcoin is property. Notice 2014-21 declared that for tax purposes Bitcoin and other virtual currencies are property, like any other capital asset, and not currency. This allows accrued long-term gains and losses to be taxed at more favorable applicable capital gains rates rather than ordinary income rates.4

Due to Bitcoin's increase in value over time, this treatment may appear to favor taxpayers. But it presents a multitude of record-keeping and enforcement challenges, and undermines its created use as a transactional currency. This position creates a substantial burden on Bitcoin users by requiring taxpayers to keep a record of every purchase made and to perform burdensome calculations accounting for the changing value of a Bitcoin. More importantly, it requires consumers, businesses and service providers to maneuver through complex and unclear tax reporting requirements. Finally, it will necessitate more clarifications from the IRS, further burdening an agency whose limited resources are already under considerable strain dealing with the Patient Protection and Affordable Care Act. Such constraints will only serve to limit the growth and usage of Bitcoin.

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B. Limitations of the Property Argument

The IRS has declared that Bitcoin is property, which ignores several significant issues that can have potential negative impacts on taxpayers, the government, or both. As a result, it can operate to limit Bitcoin's growth. In no particular order, some of the challenges of presented by a Bitcoin-as-property policy include:

1. Recognizing Capital Gains and Losses

The value of Bitcoin, while generally increasing, can and has been volatile. It is not unusual for speculators to incur large gains or losses in value over relatively short periods of time. However, unlike foreign currency traders, who can also see such swings in value, Bitcoin traders can lose twice - once in the decline in value, and again at tax time. Current tax law allows for taxation of the full amount of any capital gain, but capital losses are limited to capital gains plus $3,000.5 As a result, large losses are carried forward, often for years on end.

2. Record-Keeping

Cost basis is difficult to calculate, especially for active traders who may make dozens, if not hundreds, of trades. Part of the problem is the fact that the fair market value of Bitcoin has varied widely between exchanges (as much as 20%, and, as recently as 2013, up to 100% on some days). This variance exists because there is no accepted common Bitcoin trading platform as of yet, although a few primary services have garnered increasing support in the United States, namely Coinbase and Circle.

Further complicating matters is the existence of a myriad of secondary markets. In addition to buying Bitcoin on an exchange, participants can purchase Bitcoin through local hobbyist meetings, transactions with friends, or even through various neighborhood merchants. While large exchanges may have systems for tracking value and transactions, many of these secondary sources are not likely to have such systems, leading to problems with tax reporting capabilities (for themselves or for the purchaser) and cost basis.

3. Price Manipulation

Treating Bitcoin as property also allows taxpayers to game the system. Currently, the IRS requires taxpayers to report the fair market value on the date currency was received but unlike the current situation with stock trading, there are no third party reporting requirements. Consequently, a taxpayer can determine cost basis by using values from an exchange which consistently reports a high value over one which is consistently lower. Provided the taxpayer uses a reasonable manner which is consistently applied, the IRS is unlikely to challenge the value. In addition, the existence of multiple secondary sources means that there is no way to ensure consistent reporting from one party to the next. For example, there is no way to ensure that the fair market value reported by the seller will serve as the cost basis for the buyer. It would not be unexpected to see two parties using a different cost basis for the same transaction, with each party using the basis that most favors its position. Traders can also manipulate price by choosing the accounting method (FIFO, LIFO, specific identification or average cost), which favors them, thereby affecting calculations of gains.6

4. Other Issues

Along with property treatment comes the wash-sale rule. Under that rule, most...

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