Rethinking Basis in the Age of Virtual Currency

Abstract

In Notice 2014-21, the IRS announced that virtual currencies like Bitcoin would be treated as property — and not foreign currency — for income tax purposes. As a result, taxpayers may owe tax each time they sell or spend such currency. The IRS also declared that the traditional “stand-alone” basis rules would apply to virtual currency. This decision permits taxpayers to manipulate their tax liability by picking and choosing which virtual coins to dispose of. In this Article, I argue that taxpayers should be required to pool the basis of their virtual currency to ensure that tax gains and losses match realized economic gains and losses.

Over the years, politicians of both stripes have proposed pooling basis for securities and inventory, to no avail. The rise of virtual currencies offers a rare opportunity to re-examine the basis rules for such assets. Allowing taxpayers to manipulate their tax results without changing their economic gains or losses undermines the tax system and permits taxpayers to take advantage of the time value of money to reduce their real-world taxes. In the second half of this article, I argue that either Congress or the IRS, exercising its regulatory authority, should require taxpayers to pool basis for a wide variety of fungible assets, including securities and inventory.

Keywords: bitcoin, cryptocurrency, basis, taxation, tax, basis, inventory, accounting

JEL Classification: K34,H20,H26,