The US government may no longer treat cryptocurrency as property in certain situations. What one thought was a well-established principle is not so sacrosanct.
The US Internal Revenue Service (IRS) has previously issued announcements stating quite clearly that cryptocurrencies are property. This treatment was based on IRS Notice 2014-21 and Revenue Ruling 2019-24.
These announcements were quite clear that cryptocurrencies are deemed property and not foreign currency. For example, under IRS Notice 2014-21, using a questions-and-answers format, the IRS stated the following:
- How is virtual currency treated for federal tax purposes?
- For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
- Is virtual currency treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under US federal tax laws?
- No. Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for US federal tax purposes.
Fast forward to 27 August 2021, the Department of Justice (DOJ) filed a formal answer to a complaint from taxpayers in the US District Court for the Middle District of Tennessee, Nashville Division (Joshua Jarrett; Jessica Jarrett v. United States of America, Case No. 3:21-cv-00419). In their complaint, the Jarretts are seeking a tax refund on their digital tokens they generated.
The surprise took place when the DOJ, in responding to the Jarretts' complaint, argued that the United States does not agree that virtual currency in all instances is deemed property for the purpose of US federal tax law.
The tax implications would be significant as property is generally treated with capital treatment under section 1221 of the US Internal Revenue Code (IRC) and foreign currencies, ordinary treatment under IRC section 988. As the case heads towards litigation, more details on the DOJ's position will be delineated.