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June 13 — Bitcoin and other virtual currencies still pose tax problems for those attempting to stay in compliance and more IRS guidance is needed, a group of accounting professionals said.
In a June 10 letter to the Internal Revenue Service, an American Institute of CPAs technical advisory panel said clarifications are needed, in particular on the exchange rates taxpayers should use to determine the fair market value of virtual currency in U.S. dollars.
The group noted that with respect to bitcoin, there are few published exchanges and “the value reported on each exchange at any time of the day is unlikely the same.”
The group requested answers to questions on whether taxpayers are required to select one exchange and continue to use that exchange; if they are allowed to use an average of different exchanges; whether they may use the average rate for the day to calculate the exchange rate; and if there is a specific time of day to pull exchange rates.
The letter follows April 2014 IRS guidance (Notice 2014-21) that included directions on virtual currency in the form of answers to frequently asked questions (58 DTR G-1, 3/26/14).
“We recognize there are a few major issues, not addressed in Notice 2014-21, that may arise as virtual currency continues to expand and gain additional popularity in the marketplace,” the AICPA panel wrote.
One of the group's recommendations involved the need for guidance on the treatment of costs to mine and acquire virtual currency, in addition to whether those costs are capitalized—that is, whether the expense is recorded as a long-term asset.
In Notice 2014-21, the IRS said that “when a taxpayer successfully ‘mines' virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.”
This language implies that mining is akin to a service activity, rather than a production activity where income isn't realized until the disposal of the property through a sale, exchange or other transaction, the panel said. “Therefore, it seems the costs of mining virtual currency are treated similarly to expenses incurred in providing other services; i.e., expensed as paid or incurred,” the group said.
The AICPA panel also asked that the IRS provide alternative treatment of virtual currency under tax code Section 1012, which determines the basis of property.
“The treatment of convertible virtual currency as non-cash property means that any time virtual currency is used to acquire goods or services, a barter transaction takes place, and the parties need to know the fair market value (FMV) of the currency on that day,” the panel wrote.
The party exchanging the currency for goods or services will need to track the basis of his or her total currency to determine if a gain or loss has occurred and whether the transaction is short-term or long-term. That involves a “significant amount” of record keeping, the group said.
There are currently no alternative tracking methods for such transactions apart from securities under Treasury Regulations Section 1.1012-1(c), which means taxpayers are required to specifically identify which virtual currency lot was used for each transaction to determine the gain or loss, the panel said.
“In many cases, it is impossible for a taxpayer to track which specific virtual currency was used for a particular transaction,” the group noted.
Other concerns the panel addressed included charitable contributions and retirement investments.
The AICPA group asked the IRS to explain when a virtual currency donation valued at more than $5,000 doesn't need a qualified appraisal to validate a charitable contribution deduction. The group also requested more guidance on how to document the virtual donation values.
In addition, the panel wanted to know if retirement savings accounts are permitted to hold virtual currency investments, and if so, whether any special reporting rules or requirements exist.
In all, the group provided 10 recommendations for the IRS to consider. It noted that tax treatment of virtual currency “has quickly grown and become a prevalent concern for many taxpayers and tax practitioners,” adding a new layer of complexity to clients' reporting requirements.
“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,” the panel said.
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Text of the AICPA letter on Notice 2014-21 is in TaxCore.
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