Deep Dive Episode 49 – How Should the IRS Handle Cryptocurrencies?

Cryptocurrencies have been around for 10 years, but there remains significant ambiguity in the tax consequences of their use. A recent report by Coin Center identifies six of those ambiguities and recommends approaches to resolving them. James Foust, the report’s author, will provide an overview of what is and is not known, and suggested actions that Congress and the IRS could take to fill the gaps. Topics covered will include:

  • What guidance the IRS has published to date;
  • Calculating the fair market value of cryptocurrency;
  • Determining the cost basis of cryptocurrency dispositions; and
  • Tax implications of network forks and airdropped tokens.


Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.

William Hild:  My name is William Hild. I’m the Deputy Director of RTP. We’ve been looking forward to this afternoon’s discussion entitled “How Should the IRS Handle Cryptocurrencies?” Cryptocurrencies have been around for 10 years, but there remains significant ambiguity in the tax consequences of their use. A recent report by Coin Center identifies the major ambiguities remaining for users and recommends agency approaches to resolving them. We are pleased to have with us today James Foust, the report’s author, who will provide an overview of those ambiguities and recommend actions that Congress and the IRS could take to provide the public with more clarity.

If you would like to learn more about James, his work can be found at and on Twitter, where his handle is @jtfoust. I’m now going to turn over to James to get us started. After James finishes with his discussion of the issues, we will go to audience Q&A, so audience members, please think of what you’d like to ask our speaker. Thank you for joining us, James. The floor is yours.

James Foust:  Hi. Thank you so much for having me on. I’m really excited to be on and to have the opportunity to talk with all of you about federal tax policy and its application to cryptocurrency use. Just to give you guys a little bit of background on Coin Center, the organization, we are a non-profit research and advocacy organization. And we’re focused on the public policy issues that face cryptocurrencies and other public blockchain technologies like Bitcoin and Ethereum. We’re Washington, D.C. based. We’ve been around since 2014, so we’ve been in this space for a while. I am a somewhat recent addition. I started in September of last year.

But our executive director, Jerry Brito, and Director of Research, Peter Van Valkenburgh, are the authors of what, at least in my opinion, are some of the sort of seminal pieces of policy development in the cryptocurrency space – sort of running the field from Bank Secrecy Act and AML/KYC to securities law to state money transmission licensing regimes. So if you go to our website, which is, we have a lot of public materials going all the way back to then. So there are short-form research reports and also longer form policy development pieces. So I would really recommend that folks check that out.

But focusing in on tax policy, which is what we’re going to talk about today — tax policy is one of the few areas of United States federal regulatory approach to cryptocurrencies that has been sort of very underdeveloped to date. So while certainly not perfect, most of the federal regulatory agencies with an interest in Bitcoin or other cryptocurrencies have done a reasonably good job of thinking through how the statutes and regulations that they’re responsible for apply to cryptocurrencies and then also in communicating to the public sort of what those views are. If you look at the Financial Crimes Enforcement Network, coming out in 2013 and sort of explaining their thinking on how money transmission licensing and money service business licensing and all of the DSA requirements that come along with that map onto cryptocurrency use, or if you look at the SCC or the CDFC or the CFPB, pretty much all of the agencies have at least sort of started to develop their thinking.

And there’s a lot of nits to be picked, but at least there’s sort of some progress being made. And exception to that is tax policy. So the IRS has been looking at issues related to virtual economies and virtual currencies, actually, for longer than Bitcoin has existed. They started looking into it way back in 2007/2008 as massive multi-player, online role-playing games were growing, and as sort of like World of Warcraft, was really taking off and trying to figure out whether and how transactions and things that occur within those virtual economies should be taxed and what the tax implications of the virtual currencies that are contained in those virtual economies are.

So to kind of give you guys a roadmap of what we’re going to run through today, we’re going to focus primarily on the open questions and the recommended solutions that are laid out in the report that we put out a couple of weeks ago. And that report is focused on the open questions that are facing individuals that use cryptocurrency basically in a personal capacity.

So the state of tax policy development and the level of ambiguity that there is is so great that even just the most sort of fundamental questions have not yet been answered. So this report is basically focused on those really fundamental, basic questions. And it doesn’t get into sort of some of the nitty-gritty questions that involve partnerships or corporations or someone who’s running a Bitcoin mining business, like how they’re allowed to depreciate or account for those types of assets. That is sort of outside the scope of this report, although we will touch on it a little bit. And this report is also focused on the need for the IRS to act.

So at the end, we’ll touch on something that we think Congress should do. But for the most part, we’re focusing on the lack of guidance and the need for action from the IRS itself as an agency. So to kind of lay out a roadmap, we’ll start with going through the history of the IRS guidance to date, which is one piece of guidance that they put out in 2014. So we’ll talk through sort of the event that lead up to that and that guidance itself.

We’ll then talk about the stakeholder responses to that notice that have come out since then. And then, we’ll go through a number of the opened questions that are laid out in our report. So those questions have to do with the scope of the guidance that was giving, how to calculate the fair market value of cryptocurrencies, how to track basis in cryptocurrencies for the purposes of determining gain or lose when a cryptocurrency is disposed of, what the proper treatment of hard forked tokens should be, and then, finally, the need for a de minimis exemption from gains realized on personal cryptocurrency transaction and use.

So to start with the history of IRS guidance, the IRS National Taxpayer Advocate, which is an independent office within the IRS that is responsible for basically advocating for the view and the rights of individual taxpayers wrote in its 2008 annual report to Congress that the lack of guidance on virtual economies and virtual currencies was one of the most serious problems facing taxpayers. It’s one of the 20 most serious problems identified that year by the National Taxpayer Advocate.

And I’m going to read you a quick quote from that report, which is this: “The IRS has a duty to answer all of the basic questions about transactions undertaken regularly by significant numbers of taxpayers. The IRS needs to produce specific early guidance on difficult issues confronted by taxpayers on a regular basis in emerging areas of economic activity.” And so, as I mentioned, in that report, the National Taxpayer Advocate was talking about World of Warcraft gold or Linden dollars from Second Life. But the general point, I think, maps very well to cryptocurrencies, which is there are hard questions here. And the IRS has a duty to answer those questions and not to rely on taxpayers to sort of find their own way on these difficult questions, which is why the name of the report that we published a few weeks ago is actually called “A Duty to Answer.”

So in response to that National Taxpayer Advocate recommendation, the IRS put up a page on its website that is very concise and essentially says that things that happen in virtual economies can have tax impacts and that you should look at their existing guidance to figure out what that would be. They then were silent on the issue until, in 2013, a GAO audit and the resulting report found that the IRS really needs to—and I’m quoting again—“find relatively low-cost ways to provide information to taxpayers on the basic tax reporting requirements from transactions using virtual currencies.” So this was at the time when Bitcoin, primarily — Ethereum did not exist yet. But Bitcoin and a couple of other smaller cryptocurrencies were really sort of rising in prominence. And the GAO recognized that there are significant open questions here, and taxpayers need answers to them so that they can account for cryptocurrency use on their tax returns and they can understand what the tax burden of cryptocurrency use is.

Following that report, the IRS issued, in early 2014, a notice called Notice 2014-21, titled “IRS Virtual Currency Guidance.” And it is in the form of 16 FAQs, and they are extremely general. They apply only to convertible virtual currencies, as defined, which we’ll get into in a little bit. And they basically say general tax principles applicable to property transactions apply to transactions using virtual currency. Which it’s good to know that the laws apply, but the open questions are about how the laws apply, not whether or not they apply at all.

So to get into some of the responses that the IRS has received to that notice, other than from Coin Center, the American Institute of CPAs, in 2016, sent a letter to the IRS, that they also released publicly, encouraging and—here, I’ll quote from them again—“The AICPA encourages the IRS to release additional, much-needed guidance on virtual currency.” They followed up two years later writing “We recommend the IRS release immediate guidance regarding the tax treatment of virtual currency transactions. We request additional guidance that will address items from the original Notice 2014-21 and new issues that are relevant to the 2017 tax year.”

The IRS has also received two letters from the American Bar Association’s Section of Taxation, which sent its first letter in 2015, saying “We commend the IRS for issuing guidance on this topic, recognizing that guidance in this area may be an evolving process. These comments identify a number of issues raised by the decision to treat virtual currency as property that the notice does not address.” And then in 2018, they wrote urging the IRS to issue a temporary safe harbor for hard forked tokens, which we’ll get into later, quote, “Important developments in the cryptocurrency economy have taken place that are not addressed in this 2014 notice.”

The Treasury Inspector General for Tax Administration has also criticized the IRS for not providing substantive guidance in that 2014 notice, writing in 2016 that “there has been little evidence of coordination between the responsible functions to identify and address, on a program level, potential taxpayer non-compliance issues for transactions involving virtual currencies,” and that “The IRS should take action to provide updated guidance to reflect the documentation requirements and tax treatments needed for the various uses of virtual currencies.” Congress itself has also most recent — so they’ve written, now, four letters to the IRS asking for additional guidance on these issues, the most recent of which was a letter lead by Representative Ted Budd. That was just, I think, two weeks ago sent, now.

So the sort of overarching point here is we have very little information to go on on what the tax impact of virtual currency use is. The IRS has known about this for a little over a decade and has been, essentially, completely silent on these issues, other than to say it is indeed property and tax laws do indeed apply.

To jump into our first open question, which has to do with the scope of that 2014-21 guidance, that guidance says that it applies only to, quote, “convertible virtual currency,” where virtual currency is defined to be “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value but does not have legal tender status in any jurisdiction,” and that a convertible virtual currency is one that “has an equivalent value in real currency or that acts as a substitute for real currency.” And Bitcoin is one example.

So the primary issue here is this definition is essentially verbatim drawn from the 2013 FinCEN guidance on virtual currency. Now, as I’m sure listeners are aware, the Financial Crimes Enforcement Network is focused on monitoring for and preventing money laundering and other financial crimes. And so for them, convertibility is a very important distinction because, if something is convertible, it means that is currency-like enough that it might be used to launder money or transfer value to sanctions persons. It is not entirely clear why the convertibility distinction is important for purposes of federal tax rules. Other than maybe making it more difficult to figure out what the fair market value of a cryptocurrency is, it’s not entirely clear why the level — the ease with which something can be bought or sold for fiat is relevant to its tax treatment.

It’s also unclear where the line is of convertibility. So if you look at something like Bitcoin, which is actually given as — the only example the IRS gives, that is clearly convertible. There are many different online exchanges that you can go to and buy and sell Bitcoin. If you look at something like World of Warcraft gold, it’s unclear if that would be classified as convertible. There are no official sanctioned markets to exchange fiat for World of Warcraft gold, but there are a number of unofficial and unsanctioned markets. If Blizzard, the company that owns World of Warcraft, catches someone selling gold, they’ll ban their account. But that doesn’t mean that those markets don’t exist. They do, in fact, exist. And so the question is is World of Warcraft gold convertible, and is it subject to this guidance in Notice 2014? Or is it considered a non-convertible currency?

A little bit more complicated would be to look at something like Second Life’s Linden dollars where there actually is a Second Life sanctioned fiat to Linden dollar exchange that exists. It’s called LindeX. So this is a virtual currency that is convertible but is also used, primarily, within the realm of a video game. And historically speaking, the IRS has basically just waited until the economic activity that occurs within Second Life is transferred into the real world to tax it. So if you have a Second Life character and you have a business within Second Life, they basically wait until you withdraw profits out into the real economy — into a fiat currency of some kind or exchange it for some real goods or services to tax you on it.

This guidance would seem to imply that Second Life Linden dollars are treated the same as Bitcoin, and you would need to pay taxes on it upon receipt. The IRS has not clarified what might be considered convertible or unconvertible or what the importance of that distinction is. So this is the one question that we don’t so much have a concrete recommendation on what the IRS should do other than, if they think that the convertibility distinction is, in fact, important, to sort of unpack what the importance is and to get taxpayers the information that they need to be able to discern the difference between convertible and non-convertible virtual currencies.

Now, the second open question relates to how to calculate the fair market value of a cryptocurrency transaction. Notice 2014-21 says, quote, “Taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is lifted on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency in U.S. dollars at the exchange rate in a reasonable manner that is consistently applied.” So that’s definitely something to go on, but it doesn’t really give a taxpayer the information that they need to actually convert a receipt of virtual currency into a fair market value.

There are a number of different virtual currency exchanges that someone could go to to trade Bitcoin or any other virtual currency. And those exchanges often don’t have exactly the same exchange rate available. So depending on jurisdictional issues or liquidity issues or any number of other issues, there will be gaps. In Bitcoin, it’s usually not too extreme. But in more thinly traded cryptocurrencies, they can be pretty significant. Notice 2014-21 seems to imply that you need to choose a single exchange and then use that single exchange’s exchange rate as of the date of payment or receipt.

So first, taxpayers ought to be able to use not only just one exchange but, if they so choose, they should be able to select the average exchange rate across a number of exchanges or to use a third-party index that’s provided by some sort of non-exchange counterparty. There are a number of sites that sort of track weighted average Bitcoin exchange rate that taxpayers ought to be able to use, if they so desire. And then second, as of the date of payment or receipt is a pretty prescriptive requirement that seems to not realize that there’s often significant intra-day changes in exchange rates. And taxpayers ought to have the ability to, if they so choose, apply a more granular sort of temporal relations between a transaction and the exchange rate applied to it, right?

So rather than being required to use the exchange rate on a particular day, they should be able to either average over the course of the day on which the transaction occurs or over the course of the hour in which the transaction occurs or at the precise time at which the transaction is included in a block on the relevant blockchain.

Moving on to our third question, which is how should taxpayers — or how can taxpayers determine the basis of a cryptocurrency disposition? So an asset is disposed of when it’s either sold, given away, written off as having absolutely no value, condemned or forcibly converted, or essentially any sort of situation in which you are disposing of or getting rid of that asset.

In general, the requirement to recognize and account for a gain or loss on the disposition of an asset is that you look at — you compare your basis in that asset, which is how much you paid for it with what you got for it when you disposed of it, right? So if I buy $100 worth of Apple stock today and I sell it in a week for $200, my basis would be $100. And the fair market value of what I sold it for would be $200. If you net those things out, I have realized a $100 gain by selling those shares. That seems pretty straightforward, as long as you know how to calculate the fair market value of a cryptocurrency, which was the subject of our previous question. It seems that that should be pretty straightforward. You ought to be able to do that.

Now, where this gets a little bit more wrinkly is when you have what are called different tax lots. So let’s say that I am an individual that uses Bitcoin to sort of — in a personal and kind of occasional capacity. And I have bought Bitcoin a couple of times over the past year. I bought it once — I bought one Bitcoin for $5,000, and then, later, I bought another Bitcoin for $3,500. And then a little bit later, I bought another Bitcoin for, let’s say, $4,000. Now, I want to buy something with my Bitcoin, right? I’m going to spend one Bitcoin in a transaction. I’m going to dispose of one Bitcoin. The question is what is my basis in that Bitcoin?

And what this comes back to is which of those three tax lots — is my basis the $5,000 that I paid for the first Bitcoin, the $3,500 that I paid for the second, or the $4,000 that I paid for the third? Now, as the regulations currently read, the default basis tracking—it’s called lot relief methodology—is specific identification, which means you have to track the specific thing that you sold. And whatever you paid for that specific thing is what your basis is. So technically speaking, today, what I would need to do when I spent my Bitcoin is I would need to go to the blockchain and I would need to figure out which Bitcoin I spent. Because on the Bitcoin blockchain, all Bitcoins are basically represented as unspent transaction outputs.

So when I want to spend a Bitcoin, I go to the blockchain and I find a transaction that is listed on the blockchain where someone has sent me a Bitcoin, or more. Or I find a number of transactions where people have cumulatively sent me over a Bitcoin. And I create a transaction that says I’m going to use these existing transactions that have not been spent yet, and I’m going to spend them by sending them to these addresses. So basically today, if you transact in cryptocurrency, the sort of accounting you would need to do is sort of like if you have a whole bunch of $10 bills in your wallet.

You need to keep track of each individual dollar bill separately and track them as individual assets and figure out when you acquired and disposed of each of them on their own. Which is kind of silly because these things are pretty fungible. They all look relatively similar. It seems as though you ought to be able to apply some sort of more — less burdensome and more sensical basis tracking methodology, which we have for a lot of other kinds of assets. So for stocks and a variety of other kinds of securities, people are allowed to use first in, first out, where, rather than tracking, for example, every single share of Apple stock that someone owns and, every time they sell a share, having to figure out what the actual number on that stock certificate that they sold is and tracking that back to what they paid for that specific share of Apple stock, you could just do something like first in, first out.

Which is, whenever I sell a share of Apple stock, I just assume that the share that I had sold is the one that I acquired longest ago. Or you could do something like last in, first out, or something like average basis, where, rather than tracking each individual asset individually and its basis, I just kind of have a pooled basis where I keep track of, overall, how much money have I spent on shares in this mutual fund. And then, when I sell a share, I basically just divide how much my total basis is by what percent of my shares I’m selling. And that’s my basis. So I don’t need to keep track of each individual slip of paper. I can just apply this overarching methodology. And so our recommendation for this question is that the IRS ought to put out guidance extending the FIFO and other types of lot relief methods allowable to stocks and other securities to cryptocurrencies.

Now, I should note here that this is something on which people — I’m not sure if disagree is the right word, but certainly on which people have different approaches, which is that there are a number of sort of cryptocurrency accounting or tax service aids out there. And what they will generally tell you to do is to just do first in, first out, which is somewhat in contradiction to our report’s conclusion that the regulations don’t really let you do that because Bitcoin and other virtual currencies don’t meet the definitions of the kinds of things that are allowed to be — for which you are allowed to use a different lot relief method than just specific identification. Now, the position that you can do first in, first out seems like a pretty — from a policy perspective, it’s certainly reasonable. It is kind of ridiculous that you wouldn’t be able to. But from a black-letter reading of the regulations, you probably shouldn’t be allowed to.

So now moving on to our last open question, which is what should the treatment of forked tokens be? So to give just a quick, hopefully not too technical, background on this question, in 2017, there was what’s called a hard fork in the Bitcoin network. So what that means is — to take a step back, what a blockchain network is, what Bitcoin is, is it is a distributed network of individuals. And each of those individuals is running a piece of software that implements a shared protocol.

So there’s a set of rules that everyone has agreed on. And everybody is running some form of software that implements those rules. So if you have a blockchain network, and everyone is running a protocol, and some subset of that network decides that they want to make a change to the rules — they want to tweak their software to, for example, make the block size larger so they can include more transactions in each block. If they go ahead and do that — if they change their software but another portion of the network doesn’t change their software, you will eventually have what’s called a hard fork, which is, basically, where the network is chugging along. Blocks are being added.

And, at some point, one of the subsets will add a block that doesn’t meet the rules of the other subset’s protocol. So that other subset will reject that block and will find their own new block that does meet their rules. And you will have a fork. You will have the network diverge into two distinct new cryptocurrency networks. So where you had one, you now have two. This happened in 2017 over just that issue — over a change in block size. So in 2017, if you had one Bitcoin before the Bitcoin Cash split, after the Bitcoin Cash split, you had one token on two new networks. You used to have one token on the Bitcoin network. You now have one token on a network that eventually came to be called Bitcoin and on another network that eventually came to be called Bitcoin Cash.

And the question is what is the tax impact of that? How are you supposed to account for that on your taxes? Let’s say — I don’t remember off the top of my head exactly what the prices were, but let’s just say, right before the split, Bitcoin was worth $10,000. And a couple of weeks after the split, Bitcoin was worth $9,000, and Bitcoin Cash was worth $3,000. So you had something that was worth $10,000. Now, you have two things that, cumulatively, are worth $12,000. Is that an income recognition of them? Do you need to pay tax on the $2,000 of gain that arguably accrued to you? Or what is the proper treatment of that?

This is an issue on which there is literally no guidance because this hadn’t happened in 2014 when the IRS put out Notice 2014-21. So this is something where various folks that are in good faith trying to comply with their tax requirements come to different conclusions about what they ought to do and also where there’s no really clear, good analogous situations that exist within the tax code or the tax regs that one could try to sort of map the principles of onto this new asset because this is something that really doesn’t happen with other more traditional assets.

So just to get into what our recommendation of what the treatment of these should be — so hard forks and airdrops, which are a kind of a distribution of a new cryptocurrency that look a fair bit like hard forks in practice — they should not be considered income recognition events because no real economic impact has happened. There’s no reason to try to tax people because a Bitcoin Cash forked off of the Bitcoin network. There should further be no tax effects if the taxpayer never exercises control over the forked or airdropped tokens that they received. So if I had Bitcoin and I now have not only a Bitcoin but also a Bitcoin Cash token, if I never access or look at or touch that Bitcoin Cash token, that should have no — the existence of that token should have no impact on me as a taxpayer.

The reason behind that is that — so the Bitcoin Cash fork was a big deal in the cryptocurrency community. There was a lot of media and publicity around it. But there are hard forks all the time. Any person could, technically, fork the network at any moment that they wanted to by just going to GitHub, downloading the Bitcoin core protocol, and tweaking some things to make their own custom version. I could do that and make James Coin tomorrow. And I might be the only person running the James Coin software, but I could create what is technically a fork of the Bitcoin blockchain. And it would be a little bit impractical if, by doing that, I could create taxable events for people that I have never met and that had absolutely no way of being aware of the fact that I’ve done this.

So the forks themselves should not be recognition events. And if someone doesn’t ever exercise control or domain over the tokens, they should never have any tax impact. And further, if someone does want to take control of both of the post-forked tokens, they should be able to distribute their basis in the pre-forked token across the post-forked tokens at a pro rata — like proportional to sort of where the prices end up at some point in time after the fork. So in the example I gave where Bitcoin was ten and is now nine and Bitcoin Cash is three, you would have basically three-quarters of your existing basis would be applied to that Bitcoin token and one-quarter would be applied to the Bitcoin Cash token because the Bitcoin Cash is trading at one-third of the value of the Bitcoin token, post-fork.

So if you do want to control both, you ought to be able to distribute your basis across them. And they also ought to inherit the holding period that you had for the pre-fork token for purposes of determining long versus short-term capital gains. So in general, if you hold a capital asset for more than a year, when you dispose of it, you get a better tax rate on it. That’s taxed at a more favorable rate for you. So if I had a Bitcoin before the fork that I’d had for over a year and then the network forks, that shouldn’t reset my timer on whether or not I had a long or short-term capital gain. Both of the resulting tokens ought to inherit the one-plus year holding period that I had already accrued.

And then, last, this isn’t really an open question because it actually is answered by the IRS in its notice, but it’s answered in a kind of unsatisfactory way. And this is the need for a de minimis exemption from gains of virtual currency transactions that are personal in nature and done by an individual. So Section 988(E) of the Tax Code has an exception from foreign currency gains for individuals that are doing a personal transaction of $200 or less. And so what that means is, if you go on vacation to Europe — let’s say you go to Paris.

If when you get there you change a bunch of U.S. dollars into euros and then you spend a week going about Paris, maybe buying coffees, maybe buying some clothes, if the exchange rate between U.S. dollars and euros changes in between the time from which you acquired those euros to when you disposed of them—like when you bought a coffee—if there wasn’t a de minimis exemption, you would need to, technically, track whether or not you had realized any kind of gain on each of those transactions. So the value of the euro had gone up vis-à-vis the dollar and you bought a coffee, you might have realized a gain of a couple of pennies, and you would owe a very, very small amount of tax on that.

Realizing that, one, that’s kind of ridiculous and, two, people just wouldn’t do it, Congress passed a de minimis exemption from that which says, if it’s a personal transaction and you’re an individual taxpayer and you realize a gain of $200 or less, just don’t worry about it. That’s outside of sort of what we really care about. Because virtual currencies are not legal tender anywhere and because they’re not issued by an actual state government, the IRS has determined that that means that they do not qualify for treatment as foreign currency under Section 988. What that means is they do not get the same treatment and the same de minimis exemption.

Now, that doesn’t really make a lot of sense. And the reason it doesn’t is that, to the extent that people are using virtual currency like currency, the same policy arguments and the same thought process and the same principles apply to virtual currency as they do to a foreign currency. So there really ought to be a parallel de minimis exemption for Bitcoin and other cryptocurrencies, to the extent that they’re being used by an individual in a personal capacity. So we’re not saying investment gains should be carved out.

But so backed — there’s a partnership that was just announced between — well, partnership is probably the wrong word. But Backed and Starbucks just entered into a relationship where Starbucks might be actually accepting cryptocurrencies in the relatively near future. So if an individual were to go to Starbucks and by a cup of coffee with some Bitcoin, the same logic that applies to someone buying a coffee in Paris with euros ought to apply to that transaction. And that is something where it’s not an IRS guidance issue because they have come to the determination that it’s outside of their power. But it is something where Congress could step in and amend either Section 988 or add a new clause to extend those types of de minimis exemptions to cryptocurrency use.

And there actually was a bill in the last Congress, that would have done just that, that we are hopeful is going to be introduced again this Congress soon. So with that, I would like to thank you all for your time and open it up to questions.

William Hild:  Great. Let’s go to audience questions. While we’re waiting, James, to give people an opportunity to ask questions, let me start you off with one that came to mind while I was listening to your discussion. You mentioned at the beginning that the IRS is sort of behind other agencies in the regulation of cryptocurrencies as it pertains to their purview around taxes. Do you have any thoughts on why that may be? Are the issues that the IRS has to deal with more complicated than some of the other agencies that have interacted with this industry?

Has it just not been something they’ve been particularly interested in? Obviously, I’m asking you to editorialize there as to the way you can know exactly what they’re thinking. But I just wanted to hear your thoughts on that. Again, to ask a question, please enter star and then pound on your telephone pad. All right, James.

James Foust:  Sure. That’s a great question. Thank you. I don’t think it’s the former. I don’t think that the questions that the IRS needs to grapple with are necessarily more difficult than, say, the ones that the SEC is looking into about whether or not or when a given cryptocurrency is a security. I don’t want to speculate on why. I think it probably just has to do with resource constraints. The big tax reform bill asked the IRS to implement a lot of different things that they are frantically working on implementing. And I think that this just doesn’t really rise to the, in their eyes, the level of importance to be something that they should deal with.

We are of the opinion that, look, if the National Taxpayer Advocate a decade ago is saying these issues are timely and we need to give people answers on them, certainly, today when around 10 percent of taxpayers use some kind of cryptocurrency, we really ought to have answers to these most basic questions. It would be totally fine if the IRS were to come out with answers to the easy — the low hanging fruit questions and punt on some things. That’s actually, essentially, what the American Bar Association Section of Taxation said in their 2018 letter.

They said, “Look. This hard fork thing happened. We get that this probably raises some like really novel and potentially difficult to answer questions. But in the interim, you should put out some kind of statement saying, look, if you make a good faith effort, we’ll extend a safe harbor to you against penalties for getting it wrong if, and when we do come out with guidance, what you did doesn’t agree with what we decided was the right thing.” So allowing for the fact that there might be complicated and truly novel questions that are difficult to answer, some of these are really basic. And I don’t think there’s any excuse for not having provided taxpayers with the information they need to satisfy their tax burden.

William Hild:  Thank you, James. As a reminder, you can consult the full schedule of all of our upcoming calls on the RTP website, Also available there are previously recorded Free Lunch Podcasts. With no further questions, I just want to offer you — James, do you have any final thoughts you’d like to leave the audience with?

James Foust:  No, I think I’ve covered it. Thank you so much for having me on. I really appreciated the opportunity to talk about these issues.

William Hild:  Great. Well, on behalf of RTP, I want to thank you, James, for your interesting and valuable insight together. We welcome listener feedback by email at [email protected]. Thank you all for joining us.

James Foust

Senior Research Fellow

Coin Center

Financial Services & Corporate Governance

The Federalist Society and Regulatory Transparency Project take no position on particular legal or public policy matters. All expressions of opinion are those of the speaker(s). To join the debate, please email us at [email protected].

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