United States falls behind in virtual currency regulation
In early August, hackers apparently stole an estimated $65 million in bitcoin. This theft of 119,756 bitcoins resulted in a sudden drop in USD-BTC market value of nearly 20 percent and halted virtual currency trades for the rest of the day.
Two weeks prior to the hacking incident, a Florida judge dismissed money laundering charges against a man who agreed to sell bitcoins to an undercover agent who claimed that he was planning to exchange the virtual currency to purchase stolen credit card numbers. The judge ruled that although she cannot define it, she is certain that bitcoin isn’t money and therefore cannot be laundered.
Bitcoin pros and cons
The recent case was welcomed by virtual currency operators and by the increasing number of merchants that are accepting bitcoin (more than100,000 were identified as far back as February of 2015). The growing popularity of virtual currency is due to its numerous advantages:
- There are no bank or middleman fees;
- It provides an inexpensive and efficient way to transfer funds (including international transfers); and
- Virtual currency promotes innovation, such as the blockchain technology originally developed to track bitcoin transactions and which has spurred a number of other applications and activities.
On the flip side, however, virtual currency disadvantages are significant:
- Since accounts are anonymous, it presents numerous opportunities for criminal activity and tax evasion.
- With no financial intermediaries, virtual currency has no location and therefore no host jurisdiction for legal purposes.
Obstacles to virtual currency regulation
Bitcoin was created in 2009 and lawmakers worldwide are finally commencing efforts to regulate it. The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) was the first to issue a statement regarding virtual currency (in 2013).
The IRS, through Notice 2014-21 (in 2014), became the first governmental agency to provide guidance regarding its treatment for taxation purposes.
New York State provided the first licensing framework – although most BitLicense applicants are apparently still awaiting approval.
The U.S., however, is falling behind other countries, which are beginning to implement regulations that embrace virtual currency and related emerging companies.
Note also that as is the case with U.S. licensing in many fields, a separate license for virtual currency companies is required in nearly every U.S. state – a process that is very confusing, costly and time consuming for all companies and other organizations that operate online.
Since most people (including regulators) don’t understand how bitcoin works, it is not surprising that developing a clear regulatory framework is taking so long.
We will continue to monitor developments in this area and the IRS’ response to the American Institute of Certified Public Accountants’ questions as to how their clients should be reporting their bitcoin and digital currency use.
By Liz Prehn on VirtualCurrencyToday.com
Liz Prehn / Elizabeth Prehn is a tax attorney who regularly defendants individuals and businesses in tax controversies, white collar crime and regulatory issues. Moskowitz LLP, based in San Francisco, is a tax firm with more than 30 years of experience.