H.R. 5777

[Addition]

Would be great for adoption, but a miracle if passed.

http://www.gpo.gov/fdsys/pkg/BILLS-113hr5777ih/content-detail.html

[exoton]

It probably will not pass this year as it is a far from urgent bill in a lame duck congress. It looks like it is currently in committee now and will probably pass at least the house eventually in some form as it reduces regulations which the GOP (who controls the house) is in favor of.

One thing the bill is missing is a reversal of the IRS's ruling to treat bitcoin as property instead of currency as this makes keeping track of the value of your bitcoin when you buy and sell it very burdensome whenever a consumer tries to use/spend it

[iluvpie60]

Would be great for adoption, but a miracle if passed.

http://www.gpo.gov/fdsys/pkg/BILLS-113hr5777ih/content-detail.html

it would be great if they pass something protecting bitcoin and other cryptos.

[solex]

It probably will not pass this year as it is a far from urgent bill in a lame duck congress. It looks like it is currently in committee now and will probably pass at least the house eventually in some form as it reduces regulations which the GOP (who controls the house) is in favor of.

One thing the bill is missing is a reversal of the IRS's ruling to treat bitcoin as property instead of currency as this makes keeping track of the value of your bitcoin when you buy and sell it very burdensome whenever a consumer tries to use/spend it

Certainly reads as reversing the IRS ruling!

SEC. 5. DECLARATION OF NEUTRAL TAX TREATMENT.

    (a) In General.--It is the sense of Congress that the production,
possession or use of cryptocurrency, whether in trade, commerce or
personal non-commercial transfers, should not be disfavored or
discouraged by the Federal tax code or other Federal or State statute
or regulation.
    (b) Tax Treatment.--It is the sense of Congress that the current
guidance just promulgated and released by the Service in its Notice
2014-21 is advisory, subject to public comment and not in final form
pending the expiration of the comment period. As such, Congress
believes that the current guidance is less than optimal for the
American people and economy, and directs the Service to issue or revise
interim regulations consistent with the following.
    (c) Treatment as Currency.--It is the sense of Congress that
virtual currencies should be treated as currency instead of property in
order to foster an equitable tax treatment and prevent a tax treatment
that would discourage the use of any cryptocurrency. Tax treatment of
cryptocurrency as property does not account for the substantial
illiquidity and highly limited acceptance and use of cryptocurrency,
and substantially and unfairly discourages taxpayers engaging in a
trade or business from using cryptocurrency in commerce. This
circumstance is likely to discourage economic activity and stifle
innovation and growth. At present, a taxpayer accepting cryptocurrency
for goods or services will be taxed on the fair market value of the
cryptocurrency despite the fact that exchange rates (from
cryptocurrency to conventional currency) are both highly volatile and
published or available only on a small number of proto-exchanges in the
early stages of development, acceptance and awareness by cryptocurrency
users. As a result, current tax treatment will measure income on the
basis of an illiquid and likely inaccurate fair market value that
exceeds the taxpayer's true fair market value and hence income,
resulting in the risk of a consistent overtaxation or overpayment that
will act as a strong deterrent to or penalty for accepting
cryptocurrency in payment. Such tax treatment is inconsistent with the
tax treatment of secured notes for payment in trade or commerce, which
recognizes a discount from the face value of the note due to the
illiquid nature of the payment. (Note: See IRS Pub. 525 at 4.)

[exoton]

It probably will not pass this year as it is a far from urgent bill in a lame duck congress. It looks like it is currently in committee now and will probably pass at least the house eventually in some form as it reduces regulations which the GOP (who controls the house) is in favor of.

One thing the bill is missing is a reversal of the IRS's ruling to treat bitcoin as property instead of currency as this makes keeping track of the value of your bitcoin when you buy and sell it very burdensome whenever a consumer tries to use/spend it

Certainly reads as reversing the IRS ruling!

SEC. 5. DECLARATION OF NEUTRAL TAX TREATMENT.

    (a) In General.--It is the sense of Congress that the production,
possession or use of cryptocurrency, whether in trade, commerce or
personal non-commercial transfers, should not be disfavored or
discouraged by the Federal tax code or other Federal or State statute
or regulation.
    (b) Tax Treatment.--It is the sense of Congress that the current
guidance just promulgated and released by the Service in its Notice
2014-21 is advisory, subject to public comment and not in final form
pending the expiration of the comment period. As such, Congress
believes that the current guidance is less than optimal for the
American people and economy, and directs the Service to issue or revise
interim regulations consistent with the following.
    (c) Treatment as Currency.--It is the sense of Congress that
virtual currencies should be treated as currency instead of property in
order to foster an equitable tax treatment and prevent a tax treatment
that would discourage the use of any cryptocurrency. Tax treatment of
cryptocurrency as property does not account for the substantial
illiquidity and highly limited acceptance and use of cryptocurrency,
and substantially and unfairly discourages taxpayers engaging in a
trade or business from using cryptocurrency in commerce. This
circumstance is likely to discourage economic activity and stifle
innovation and growth. At present, a taxpayer accepting cryptocurrency
for goods or services will be taxed on the fair market value of the
cryptocurrency despite the fact that exchange rates (from
cryptocurrency to conventional currency) are both highly volatile and
published or available only on a small number of proto-exchanges in the
early stages of development, acceptance and awareness by cryptocurrency
users. As a result, current tax treatment will measure income on the
basis of an illiquid and likely inaccurate fair market value that
exceeds the taxpayer's true fair market value and hence income,
resulting in the risk of a consistent overtaxation or overpayment that
will act as a strong deterrent to or penalty for accepting
cryptocurrency in payment. Such tax treatment is inconsistent with the
tax treatment of secured notes for payment in trade or commerce, which
recognizes a discount from the face value of the note due to the
illiquid nature of the payment. (Note: See IRS Pub. 525 at 4.)

Ah damm, you are correct. I guess the article I read describing the bill left this part out (this reflects poorly on bitcoin related news sites). Although this is technically subject to change since bills in committee often change, sometimes substantially

[grappa_barricata]

beware of semantics subtlety: 'protection' == 'control, but sounds nicer'

[AJinNYC]

It probably will not pass this year as it is a far from urgent bill in a lame duck congress. It looks like it is currently in committee now and will probably pass at least the house eventually in some form as it reduces regulations which the GOP (who controls the house) is in favor of.

One thing the bill is missing is a reversal of the IRS's ruling to treat bitcoin as property instead of currency as this makes keeping track of the value of your bitcoin when you buy and sell it very burdensome whenever a consumer tries to use/spend it

Not to mention the one, and only, sponsor of it got voted out of office this last election. He's gone come January.

[The00Dustin]

I am all for the moratorium, but I don't understand how so many people can think it would be better for the IRS to treat bitcoin as a foreign currency.  This would be a terrible thing for the majority of holders and users alike.  There are a few things that make the current treatment far better, and treatment as virtual currency doesn't have the favorable treatment everyone keeps alluding to.

To be clear, bitcoin being treated as foreign currency would not be bitcoin being treated similar to forex trading.  There is a reason that forex brokerages settle to USD and then re-convert to the foreign holding daily, and it's not just so they can collect the commissions.  If they didn't do this, it would lead to the disadvantages I'm listing below, so don't argue about how forex trading taxes work, because it's not the same.  Buying bitcoin and holding it is more like buying any other foreign currency and holding it when you travel (or at an international airport if you like paying through the nose).

That having been said, the advantage everyone seems to think they will get is not having to keep track of cost basis (these people are clearly not forex traders, but they are also clearly not securities traders, and they don't understand that doing taxes for securities is not that difficult).  The fact of the matter is you MIGHT not have to report gains on every single transaction you make.  You are still legally required to know your cost basis in order to report gains on transactions worth over $300 USD (if the posters making that statement are actually right) and it's possible that you are legally required to report gains on all transactions if you have an annual transaction volume of over $300 USD (I'm not sure and don't feel like doing the research, but either way you still have to keep track of everything, otherwise the IRS can make assumptions during an audit).

Now, for the disadvantages:
*This would open the possibility of FATCA reporting, which could negatively affect many US holders if the value of bitcoin increases significantly (there are huge fines for missing or screwing up a form, and what purpose do the forms serve if not to invite extra scrutiny from the IRS?).
*All foreign currency gains are treated as income at your current tax rate with no favorable rate for long term gains (you bought bitcoin at under $100?  bye bye to a much larger percentage of it when you spend any significant amount of it at over $1000).
*Foreign currency losses cannot be claimed for the same transaction set that gains don't have to be reported for (so suppose you bought 1 BTC @ $1000 and then spent it at $300, the time frame isn't even important, no tax loss for you).
*I'm not 100% certain larger losses can be claimed outside of forex trading, but I'm not going to state for a fact that they cannot be without doing the research.

So if this bill were passed in its current form, it might be more of a bitcoin killer for US individuals than the New York registration requirements that are being drafted and the similar requirements California is considering drafting.  Why does that excite anyone?

Like I said, I'm all for the moratorium, but the tax bit not so much.  I told my congressman as much.

[malaimult]

^^^I don't think this is accurate. The fact that bitcoin is treated as property means that you must keep track of the cost of bitcoin and the value of the goods/services when you spend your bitcoin on such goods/services and pay taxes on the difference.

If a US citizen were to go overseas they would not need to do the same when they buy and spend the local currency when they are overseas.

If you are trading currencies (for example on the forex market) then yes, you must report any profit/loss on your trades, but this is very different then buying bitcoin and spending it at the store

[The00Dustin]

^^^I don't think this is accurate. The fact that bitcoin is treated as property means that you must keep track of the cost of bitcoin and the value of the goods/services when you spend your bitcoin on such goods/services and pay taxes on the difference.

If a US citizen were to go overseas they would not need to do the same when they buy and spend the local currency when they are overseas.

If you are trading currencies (for example on the forex market) then yes, you must report any profit/loss on your trades, but this is very different then buying bitcoin and spending it at the store

You are right, if you go to bitcoinland and bitcoin is treated as foreign currency, then you are in good shape, but if you come back to the US and buy things in USD with conversion, you have to keep track of what you paid for the bitcoin and what you got from the bitcoin.  Also, there is no bitcoinland, so you always have to keep track either way.

ETA: It appears I may have been wrong, in which case you are wrong even if you travel to bitcoinland to make these exchanges.  See my following post:

[The00Dustin]

ETA:  I am not an accountant and the information contained in this post is not to be construed as financial advice.  This post consists solely of personal opinions and links referencing information used to form those opinions.

for US citizens:


from http://www.law.cornell.edu/uscode/text/26/985:

(a)  In general 
Unless otherwise provided in regulations, all determinations under this subtitle shall be made in the taxpayer’s functional currency.

 (b)  Functional currency 
 (1)  In general 
For purposes of this subtitle, the term “functional currency” means—

 (A) except as provided in subparagraph (B), the dollar, or 

 (B) in the case of a qualified business unit, the currency of the economic environment in which a significant part of such unit’s activities are conducted and which is used by such unit in keeping its books and records.

Translation: if you aren't a business, you not only do your taxes in dollars, like all US citizens, but you also keep track of everything in dollars, presumably even in foreign countries, making the above argument moot if not wrong.


from http://www.law.cornell.edu/uscode/text/26/988:

(a)  General rule 
Notwithstanding any other provision of this chapter—

 (1)  Treatment as ordinary income or loss 
 (A)  In general 
Except as otherwise provided in this section, any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss (as the case may be).

Translation: ordinary income or loss means you pay your full marginal tax rate (no long term gains or losses to benefit from).  Also, notice "any ... transaction shall be computed separately".

(3)  Source 
 (A)  In general 
Except as otherwise provided in regulations, in the case of any amount treated as ordinary income or loss under paragraph (1) (without regard to paragraph (1)(B)), the source of such amount shall be determined by reference to the residence of the taxpayer or the qualified business unit of the taxpayer on whose books the asset, liability, or item of income or expense is properly reflected.

 (B)  Residence 
For purposes of this subpart—

 (i) In general  The residence of any person shall be— 
 (I) in the case of an individual, the country in which such individual’s tax home (as defined in section 911 (d)(3)) is located

Translation, your bitcoin were earned/bought at home (as was the foreign currency bought when traveling)

(b)  Foreign currency gain or loss 
For purposes of this section—

 (1)  Foreign currency gain 
The term “foreign currency gain” means any gain from a section 988 transaction to the extent such gain does not exceed gain realized by reason of changes in exchange rates on or after the booking date and before the payment date.

 (2)  Foreign currency loss 
The term “foreign currency loss” means any loss from a section 988 transaction to the extent such loss does not exceed the loss realized by reason of changes in exchange rates on or after the booking date and before the payment date.

Translation: all gains and losses an foreign currency are based on the exchange rate (given this, gains/losses above and beyond the exchange rate may be treated differently for tax purposes, but let's assume exchanges are done at market rate, and there are no other gains and losses, because the exchange rate is certainly going to account for the majority of the gains and losses)

(c)  Other definitions 
For purposes of this section—

 (1)  Section 988 transaction 
 (A)  In general 
The term “section 988 transaction” means any transaction described in subparagraph (B) if the amount which the taxpayer is entitled to receive (or is required to pay) by reason of such transaction—

 (i) is denominated in terms of a nonfunctional currency, or 

 (ii) is determined by reference to the value of 1 or more nonfunctional currencies. 

 (B)  Description of transactions 
For purposes of subparagraph (A), the following transactions are described in this subparagraph:

 (i) The acquisition of a debt instrument or becoming the obligor under a debt instrument. 

 (ii) Accruing (or otherwise taking into account) for purposes of this subtitle any item of expense or gross income or receipts which is to be paid or received after the date on which so accrued or taken into account. 

 (iii) Entering into or acquiring any forward contract, futures contract, option, or similar financial instrument. 

The Secretary may prescribe regulations excluding from the application of clause (ii) any class of items the taking into account of which is not necessary to carry out the purposes of this section by reason of the small amounts or short periods involved, or otherwise.

 (C)  Special rules for disposition of nonfunctional currency 
 (i) In general  In the case of any disposition of any nonfunctional currency— 
 (I) such disposition shall be treated as a section 988 transaction, and 

 (II) any gain or loss from such transaction shall be treated as foreign currency gain or loss (as the case may be). 

 (ii) Nonfunctional currency  For purposes of this section, the term “nonfunctional currency” includes coin or currency, and nonfunctional currency denominated demand or time deposits or similar instruments issued by a bank or other financial institution.

Translation: when you buy, sell, borrow, loan, or contract anything, it is a foreign currency transaction if foreign currency or nonfunctional currency is involved.

(e)  Application to individuals 
 (1)  In general 
The preceding provisions of this section shall not apply to any section 988 transaction entered into by an individual which is a personal transaction.

 (2)  Exclusion for certain personal transactions 
If—

 (A) nonfunctional currency is disposed of by an individual in any transaction, and 

 (B) such transaction is a personal transaction, 

no gain shall be recognized for purposes of this subtitle by reason of changes in exchange rates after such currency was acquired by such individual and before such disposition. The preceding sentence shall not apply if the gain which would otherwise be recognized on the transaction exceeds $200.

 (3)  Personal transactions 
For purposes of this subsection, the term “personal transaction” means any transaction entered into by an individual

Translation: because you're an individual, you don't have to keep track of transaction where you gain less than $200, but you also don't get to claim losses, ever (-$1000 does not exceed +$200).


As I was saying, you have to keep track of your cost basis because the code says in my first quote and also in order to know whether or not a gain exceeds $200.  So your record keeping requirements do not change based on treating BTC as currency (foreign or nonfunctional).  Moreover, as I already mentioned, treating it as foreign currency could effect FATCA requirements.  Finally, if you bought one BTC for $30 and bought a $500 leather jacket for one BTC over one year later with no other capital losses to report, using 2014 tax brackets, and based on your income assuming you are single, you would owe the following additional taxes:

Adjusted Gross Income: $9075 or less
BTC as Currency (10%): $47
BTC as Asset (0%): $0

Adjusted Gross Income: $9076-$36,900
BTC as Currency (15%): $70.5
BTC as Asset (0%): $0

Adjusted Gross Income: $36,901-$89,350
BTC as Currency (25%): $117.5
BTC as Asset (15%): $70.5

Adjusted Gross Income: $89,351-$186,350
BTC as Currency (28%): $131.6
BTC as Asset (15%): $70.5

Adjusted Gross Income: $186,351-$405,100
BTC as Currency (33%): $155.1
BTC as Asset (15%): $70.5

Adjusted Gross Income: $405,101-$406,750
BTC as Currency (35%): $164.5
BTC as Asset (15%): $70.5

Adjusted Gross Income: $406,751+
BTC as Currency (39.6%): $186.12
BTC as Asset(20%): $94

For the record, this is a gain of $470, and the minimum income amounts on all of those examples above needs increased by $470 or part of the gain would fall into the lower bracket.  Additionally, these all treat the BTC gain as the last part of the Adjusted Gross Income, so the effective rate of the BTC as currency bit would be lower, but the dollar amounts shown above are how much your taxes would be increased due to that income.  That having been said, here is a similar example showing tax reductions where the only things that change are that you bought one BTC for $500 and you bought a $30 item for 1 BTC over a year later (so in these cases, again, the minimum adjusted gross income needs increased by $470 or part of the savings from the loss falls into a lower bracket):

Adjusted Gross Income: $9075 or less
BTC as Currency (cannot be claimed): $0
BTC as Asset  (counts against income rate): -$47

Adjusted Gross Income: $9076-$36,900
BTC as Currency (cannot be claimed): $0
BTC as Asset  (counts against income rate): -$70.5

Adjusted Gross Income: $36,901-$89,350
BTC as Currency (cannot be claimed): $0
BTC as Asset  (counts against income rate): -$117.5

Adjusted Gross Income: $89,351-$186,350
BTC as Currency (cannot be claimed): $0
BTC as Asset  (counts against income rate): -$131.6

Adjusted Gross Income: $186,351-$405,100
BTC as Currency (cannot be claimed): $0
BTC as Asset  (counts against income rate): -$155.1

Adjusted Gross Income: $405,101-$406,750
BTC as Currency (cannot be claimed): $0
BTC as Asset  (counts against income rate): -$164.5

Adjusted Gross Income: $406,751+
BTC as Currency (cannot be claimed): $0
BTC as Asset (counts against income rate): -$186.12

So, given that you have to keep track either way, why on Earth would you want BTC treated as currency?  Even if some of my information were wrong, treating it as currency would never reduce your taxes more than treating it as an asset, but treating it as currency would still certainly increase your taxes more in some cases that are likely to far exceed the amounts saved where you don't have to report gains under $200.  Also, don't forget there are tax structuring laws, so don't think you can gain $200 repeatedly on a regular basis and never have to report it by making small transactions, because that won't fly in most cases.

ETA:  I am not an accountant and the information contained in this post is not to be construed as financial advice.  This post consists solely of personal opinions and links referencing information used to form those opinions.

[malaimult]

My argument is that treating bitcoin as a foreign currency would reduce the burden on the "average" consumer who is using bitcoin as a payment method. While you are technically correct in saying that a consumer would need to keep track of his gains (per what I can get from your quotes from cornell), I don't think that potential gains would often come anywhere close to $200 for most consumers, as in theory, treating bitcoin as a currency should cause it to appreciate and then have a much more stable price, plus the fact that consumers do not generally have such large amounts of money that even a 10% gain in the price of bitcoin would cause a $200 gain

[The00Dustin]

The average consumer probably can't afford an accountant to deal with FATCA requirements or the fines that come about when FATCA requirements are botched, either...  Besides, if the average consumer mined the bitcoin and the mining income was delayed as the other part of the bill suggests, then the average consumer that happens to have a piece of mining equipment might effectively gain more than $200 at the grocery store.

ETA: Of course causing Bitcoin to appreciate faster could also lead to the average consumer being more likely to have gains that are tempting to spend at least in that "beneficial" transitional period.

[The00Dustin]

I think I may be wrong on the FATCA concern.  Financial accounts could include accounts holding assets, in which case the classification is irrelevant to the FATCA requirement and the only way it would be a concern is if review including review of the FATCA requirement.  Regardless, I think the currency treatment hurts early adopters and investors, and while one can speculate currency treatment could increase value, one can also speculate it would decrease value.  Bitcoin isn't deflationary yet due to the large mining subsidy, and don't forget you can't claim losses with currency, so even if they're small losses, they'd add up.