IRS adjusts crypto guidance for countries that accept Bitcoin

The Internal Revenue Service has slightly revised its 2014 guidance on the treatment of virtual currency to reflect the fact that some countries now accept Bitcoin as legal tender.

The tax authorities issued Message 2023-34 on Monday, basically updating Notice 2014-21 because it stated that digital currencies were not legal tender; However, the IRS noted that since then some foreign jurisdictions have passed laws characterizing Bitcoin as legal tender.

“Therefore, the sentence in the background section of Notice 2014-21 stating that virtual currency does not have legal tender status in any jurisdiction is no longer accurate with respect to Bitcoin,” the IRS said.

In 2021, the government of El Salvador made headlines around the world by adopting Bitcoin as legal currency. The Central African Republic adopted Bitcoin as legal tender in April last year. Some countries, on the other hand, have completely banned the use of cryptocurrency.

The tax authorities issued Message 2014-21 Almost a decade ago, virtual currency like cryptocurrency was treated as property for federal tax purposes, so the general tax principles that can be applied to real estate transactions also apply to transactions using convertible virtual currency. The background section stated that virtual currency does not have legal tender status in any jurisdiction, which is no longer the case.

In addition, the IRS noted that the background section could be misinterpreted as exaggerating the similarity between convertible virtual currency and “real” currency because the use of convertible virtual currency, including Bitcoin, to perform “real” currency functions is limited. Accordingly, in the new guidance, Notice 2014-21 is amended by amending the third sentence of the first paragraph of the background section to read as follows:

“In certain contexts, virtual currency may serve one or more of the functions of ‘real’ currency – i.e. the coin and paper money of the United States or any other country designated as legal tender, circulating and commonly used and accepted as a medium of exchange in the issuing country – but the use of virtual currency to perform “real” currency functions is limited.”

However, the IRS noted that the change in the background section does not affect the answers to the frequently asked questions in Part 4 of Notice 2014-21, including Q&A-2, which concludes that convertible virtual currency is not treated as currency that could generate foreign exchange gain or loss for federal tax purposes.

At the end of March, the tax authorities and the Ministry of Finance published a notice with preliminary guidance on non-fungible tokens and said it plans to offer more detailed guidance in the future on NFTs, which, like cryptocurrency, are digital assets tracked on a blockchain (see the story). American Institute of CPAs asked the tax authorities this month for guidance specifically on crypto losses.