May 2018 JD Supra
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Who will have the last word with Virtual Currency? IRS, FinCEN, SEC, OFAC or the CFTC? was published by JD Supra on 5/15/18.

Virtual Currency (VC) investors are currently investing without clarity regarding which Government Agency(s) has the final word with respect to the treatment of VC.   US Agencies: IRSFinCENSEC and CFTC – have expressed differing views about VC.  Different interpretations from the main US Regulating Agencies can place confusing compliance burdens on VC investors.   

Despite the evolving changes in the landscape of VC, it is certain that VC investors or facilitators that are a “US Person” should comply with the Office of Foreign Asset Control (OFAC); which recently released clarity via Frequently Asked VC Questions (FAQs).  Notable takeaways from the OFAC FAQs are:

  • Compliance obligations “are the same, regardless of whether a transaction is denominated in digital currency or traditional fiat currency”
  • “Persons including technology companies; administrators, exchangers, and users of digital currencies; and other payment processors should develop a tailored, risk-based compliance program, which generally should include sanctions list screening and other appropriate measures”
  • “Parties who identify digital currency identifiers or wallets that they believe are owned by, or otherwise associated with, a Specially Designated National And Blocked Person (“SDN”)                          and hold such property should take the necessary steps to block the relevant digital currency and file a report with OFAC that includes information about the wallet’s or address’s ownership, and any other relevant details”.

Four Different Regulatory Interpretations

  1. IRS: For federal tax purposes, VC treated as property. A taxpayer who receives VC as payment for goods or services must, in computing gross income, include the fair market value of the VC, measured in U.S. dollars, as of the date that the virtual currency was received. The basis of VC that a taxpayer receives as payment for goods or is the fair market value of the VC in U.S. dollars as of the date of receipt.  If the fair market value of property received in exchange for VC exceeds the taxpayer’s adjusted basis of the VC, the taxpayer has taxable gain. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer; which means that buying a cup of coffee with Bitcoin is cumbersome for a Taxpayer because it can trigger capital gain reporting.  There is a Bill under way in the House of Representatives that is proposing to exempt $600 worth of VC transactions.
  2. FinCEN:  Investors in VC utilize the services of on-line “secure” platforms for buying, selling, transferring, and storing VC.  The providers of these services are known as web-wallets (Coinbase is an example).  They are required to register and operate as Money Service Businesses (MSB) by the Financial Crimes Enforcement Network (FinCEN).   MSB’s that operate in the U.S. are regulated by the states.  This means that while web-wallets are not subjected to direct oversight of the Securities Exchange Commission (SEC), MSB’s are required to keep records and file reports on certain transactions to FinCEN by Bank Secrecy Act (BSA) regulations.
  3. SEC: On  March 7, 2018, the SEC stated that “Online trading platforms have become a popular way investors can buy and sell digital assets”  and that  “a number of these platforms provide a mechanism for trading assets that meet the definition of a “security” under the federal securities laws.  If a platform offers trading of digital assets that are securities and operates as an “exchange,” as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange”
  4. CFTC: The US Commodity Futures Trading Commission has stated over the last three years that VC is a “commodity” and should be regulated by the CFTC. 

What does this mean?

This is confusing and complex without clear guidance because each of these Agencies have different interpretations:

  • For the IRS: VC is property
  • For FinCEN: VC falls under a Money Service Business and VC exchange platforms must register with FinCEN
  • For the SEC:  VC is a security
  • For the CFTC: VC is a commodity

Don’t be a Victim of Your Own Making

Given the uncertainty of where exactly in the regulatory landscape VC falls, all VC holders must proceed with caution.  There is no universal clarity regarding reporting obligations, enforcement, governance and definition of VC.  How are VC holders expected to comply when there is no roadmap?  Is VC to be treated as property, as currency, as a security or as a commodity

Minimally, VC holders ought to consult with a specialized tax consultant and stay on top of regulatory news as the regulatory landscape continues to shift.