Bitcoin and the Definition of Foreign Currency

40 Pages Posted: 27 Mar 2016 Last revised: 29 Jan 2017

See all articles by Adam Chodorow

Adam Chodorow

Arizona State University (ASU) - Sandra Day O'Connor College of Law

Date Written: March 18, 2016

Abstract

The IRS recently dealt a blow to Bitcoin enthusiasts by ruling that Bitcoin and other similar currencies should be treated as property – and not foreign currency – for income tax purposes. As a result, those who use bitcoins to purchase goods or services must report gain or loss on each transaction if the bitcoins have changed value between the time they were acquired and spent. Treating Bitcoin as a foreign currency would have permitted individuals to take advantage of the personal use exemption, which could facilitate Bitcoin’s adoption, and required taxpayers to adopt a formulaic system for tracking the basis of commingled bitcoins. The IRS’s decision seems correct as a matter of positive law, but laws can always be changed.

In this Article I consider whether Bitcoin should be treated as a foreign currency for income tax purposes. I conclude that tax authorities should not classify Bitcoin as a foreign currency because (1) expanding the definition could create significant administrative and line-drawing problems, and (2) it is not in the government’s interest to promote Bitcoin or other alternate currencies. Nor should authorities simply extend the personal use exemption to Bitcoin. In contrast, authorities should extend the basis rules applicable to foreign currency to Bitcoin to relieve taxpayers of unnecessary administrative hassles and prevent them from using the basis rules to improperly reduce their tax obligations.

Keywords: income tax, virtual income, foreign currency

JEL Classification: H20, K34, E5

Suggested Citation

Chodorow, Adam, Bitcoin and the Definition of Foreign Currency (March 18, 2016). 19 Florida Tax Review 367 (2016), Available at SSRN: https://ssrn.com/abstract=2754707

Adam Chodorow (Contact Author)

Arizona State University (ASU) - Sandra Day O'Connor College of Law ( email )

Box 877906
Tempe, AZ 85287-7906
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
453
Abstract Views
3,666
rank
88,965
PlumX Metrics