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Update of Bitcoin Litigation

By January 24, 2017December 14th, 2023No Comments

The Internal Revenue Service (IRS) is continuing to develop and solidify its encompassing strategy for an individual’s compliance when using virtual currencies. At this point, the IRS has now defined virtual currencies as both a property and a currency.

As the IRS gains more depth and a clearing understanding of virtual currencies, it will identify compliance problems encountered in examinations of individual’s tax returns where virtual currencies exist.

Since the Government Accounting Office, GAO, issued its report on virtual currencies three years ago, the IRS’s position on virtual currency as a tax compliance risk requiring additional oversight has remained relatively unchanged and falls within several U.S. Governmental acts, including the Bank Secrecy Act, (BSA) that was enacted to help prevent money laundering as well as creates a number of reporting obligations upon financial institutions and Money Services Businesses (MSB) which includes check cashers, issuers and redeemers of travelers’ checks and money orders, and money transmitters.

The Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), has BSA enforcement responsibilities for these financial institutions and as the use of virtual currencies in taxable transactions becomes more commonplace, additional actions are being taken by FinCEN. You should note that the IRS pursues BSA enforcement responsibilities through its Specialty Examination function in the Small Business/ Self-Employed Division and pursues criminal violations of the BSA through its Criminal Investigation.  So, if you received an examination letter from the IRS’s International Small Business/Self-Employed Division, be careful because it also strongly implies a parallel criminal investigation.

Within the next two months, it will have been 4 years since FinCEN issued interpretive guidance that addresses the applicability of the BSA to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currency. The guidance provides information to help taxpayers determine whether their activities with virtual currencies classify them as an MSB, which are types of nonbank financial institutions that are regulated by the BSA. Specifically, these guidelines distinguish the differences between users, administrators, and exchanges of virtual currency.

For example: Here are the important definitions to remember to see if you are one of these types of categorized individuals;

1) A user is a person who obtains virtual currency to purchase goods or services.

2) An administrator is a person who is engaged as a business in using (putting into circulation) a virtual currency and who has the authority to redeem (to withdraw from circulation) such virtual currency.

3) An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.

4) This is a safe harbor for most of us, FinCEN guidance states that a user who obtains virtual currency and uses it to purchase real or virtual goods or services is not an MSB.

5) CLEAR CAUTION: FinCEN states that an administrator or exchange that 1) accepts and transmits a virtual currency or 2) buys or sells virtual currency for any reason is a money transmitter (an MSB) under FinCEN’s regulations and would be subject to, excluding limitations or exemptions, the BSA monitoring and reporting.

6) LESS CLEAR CAUTION: There are other requirements to being considered an MSB, including engaging in one or more transactions on or after September 20, 1999, in an amount greater than $1,000, in currency or monetary instruments, for any person and during any one day and guidance is contained in FinCEN regulations provide that whether a person is a money transmitter is a matter of facts and circumstances.

Michael Nelson

Michael has great depth of experiences and skills that evolved from over 35 years of representing international businesses, executives, expatriates and multi-national families. From these years of successful legal representations of CEOs of Fortune 500 Companies to family clients with needs from complex estate planning to international trusts and private foundations. He is committed to his clients, always finding better alternatives or options for his clients. Dedication to the client is synonymous with his name.