Bitcoins Update (10/11/14)

I will summarize key points I found interesting from an article I just read on the tax treatment of Bitcoin and the IRS's response to it.  David D. Stewart, ABA Meeting: IRS Preps Bitcoin Investigators as Treatment Questions Remain, 2014 TNT 184-9 (9/23/14), no link available.  The article summarizes discussion at an ABA Tax Section meeting of the Civil and Criminal Tax Penalties Committee on 9/20.

1.  Use of bitcoin is not inherently illegal.  However, using bitcoin to skirt the U.S. tax law is illegal.  It's use can also be illegal under other laws such as money laundering.

2.  According to Bryan Skarlatos of Kostelantetz & Fink, Bitcoin is not as anonymous as cash, although in some cases its use may be more convenient.

3.  According to an IRS representative, "the government is getting more sophisticated in tracking transactions in which the currencies are used improperly."  The principal focus of the investigations is money laundering, but the IRS is gearing up for criminal tax investigations.

4.  The article reports on how the government traces:

"Sparkman noted that because bitcoin transactions are recorded in the public block chains, investigators have been able to trace them back all the way to their origins. She said that the one difficulty that remains is in breaking the passwords used to protect the private encryption keys that grant control over the coins themselves, but that it can be done, or the government may gain access through a cooperative party."

5.  The IRS/Treasury is getting suspicious activity reports on bitcoin activity.

6.  The substantive treatment is that bitcoins are treated as property rather than as currency.

7.  One participant said that, for underlying substantive tax treatment, the gain from realization of bitcoins would be taxable but the losses would not be deductible because bitcoin acquisitions are not entered for profit.

8.  On Bitcoin custodians:

"Bitcoin custodians that hold accounts are money transmitters under federal law, while foreign custodians could be foreign financial institutions. Asked whether virtual currency intermediaries should be subject to FATCA requirements, Keyso said the government is aware of the issue but does not yet have a "published position" on the question.

9.  On use of bitcoins as cash payments for CTRs/Forms 8300:  Uncertain.