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Bitcoin continues to confound financial and tax officials worldwide.

BTC China, the country's first and largest digital currency exchange, announced Thursday, Sept. 14, that would stop trading by the end of the month. One reason apparently is the Chinese government ban instituted days earlier of fund-raising for new digital currencies.

Although China embraced Bitcoin trading, the virtual currency's growth has increasingly worried the nation's regulators.

One of the concerns was tax evasion.

"Because it is traded anonymously and peer to peer, Bitcoin makes it easy for money laundering and tax evasion," Sheng Songcheng, an adviser to the People's Bank of China, the country’s central bank, told The New York Times.

Swiss say OK to Bitcoin: Meanwhile, around 5,000 miles to the west, a Swiss city is preparing to accept tax payments in Bitcoin.

Chiasso, the southernmost of Switzerland's municipalities, has announced that it will accept tax payments in Bitcoin starting in January 2018. The virtual currency will be valid legal tender for payment of bills of up to 250 Swiss francs (CHF).

Where China is backing away from Bitcoin, Switzerland, already (in)famous in financial and tax circles for its legendarily secretive bank accounts, is according to some reports looking to become a global leader in the Bitcoin and cryptocurrency industries.

The Bitcoin tax payment move by Chiasso could help it challenge country rival Zug's Crypto Valley as a major global hub for virtual currency adoption and innovation, writes Samuel Haig at Bitcoin.com.

Zug already accepts tax payments in Bitcoin, but in slightly smaller cap of 200 CHF. Since July, Zug received more than 40 payments in bitcoin.

So where is the United States when it comes to virtual currency? First, it doesn't view it as currency. Bitcoin and its brethren, in the eyes of (and this statement from) the Internal Revenue Service, are not equivalent to "the coin and paper money of the United States."

Virtual currency, per IRS Notice 2014-21 issued more than three years ago, is treated as property for U.S. federal tax purposes.

General tax principles that apply to property transactions apply to transactions using virtual currency, says the IRS. Among other things, this means that:

  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
  • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. 

U.S. tax compliance concerns: The IRS, however, is worried that some folks who deal in Bitcoin et al are not following its tax rules.

Last November, the IRS sent a broad request, typically referred to as a John Doe summons, to Coinbase, the largest Bitcoin exchange in the United States, asking for the records of all customers who bought virtual currency from the company from 2013 to 2015.

The justification for the summons, said the IRS, was that one of its agents had found three cases in which people were using Bitcoin to evade taxes. Two of those instances involved Coinbase customers.

"The IRS not only has suspicion that the John Doe class includes U.S. taxpayers who are not complying with the law — it knows that the class in the past included such violators, and very likely includes others," according to the legal request.

Legislation to simplify compliance: But knowing, or suspecting, is one thing. Getting actual filings is another.

For tax year 2015, only 802 U.S. taxpayers reported their Bitcoin-related capital gains or losses to the IRS. Those few compliant filers earn the most recent (a few hours ahead of its regular weekend announcement) By the Numbers accolades.  

Some lawmakers say that the Cryptocurrency Fairness in Taxation Act (CFTA) could benefit both the IRS and taxpayers facing virtual currency tax issues.

The House bill, introduced Sept. 7 by Rep. Jared Polis (D-Colorado) and Rep. David Schweikert (R-Arizona), would create an exemption for transactions of less than $600. The bills' sponsors, who are co-chairs of the Congressional Blockchain Caucus, say it would subject digital currency to the tax regime that currently exists for foreign currency.

There's even talk of trying to roll the cryptocurrency bill into any tax reform measure.

Bitcoin info effort drags on: The effort to get Coinbase customer information has continued into this year.

In July, the IRS sought to narrow its investigation to records for Coinbase users who have conducted "at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013-2015 period"

Coinbase, however, thinks that the government is still asking for too much information, saying the IRS request is not a serious investigative effort, but rather little more than a "massive fishing expedition, hoping to find some evidence of tax avoidance so that the IRS may quiet its critics in Washington, D.C. and justify this misguided adventure."

The D.C. critics referred to by Coinbase include the Treasury Inspector General for Tax Administration (TIGTA).

Right before the IRS issued the info request last year to Coinbase, TIGTA released a report saying that the IRS needs to take additional steps to ensure full tax compliance when it comes to virtual currency transactions.

"Although the IRS issued Notice 2014-21, Virtual Currency Guidance, and established the Virtual Currency Issue Team, there has been little evidence of coordination between the responsible functions to identify and address, on a program level, potential taxpayer noncompliance issues for transactions involving virtual currencies," said TIGTA in a statement issued in connection with the report. "None of the IRS operating divisions have developed any type of compliance initiatives or guidelines for conducting examinations or investigations specific to tax noncompliance related to virtual currencies."

Money needed to police, accept virtual currency: The reality is that the IRS, like many other federal government agencies, tends to be a bit behind the curve. That's not a slam, just an observation.

The reasons why Uncle Sam is often a trailing indicator of global trends of all sorts are many. Ironically, money — the coins and paper the agency referenced in its virtual currency position — is a major one.

Until the IRS gets the funds to update its systems, expect its actions to be more along China's Bitcoin approach rather than that of the more accepting Swiss cities.

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Comments

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Miguel (The Rich Miser)

Interesting...I would have thought that, like banks and brokers, entities like Coinbase and Gemini (that also offer coin-custody services for their customers, besides buying and selling the coins) would report capital gains and losses to the IRS and the customer.

Given coins' volatility, there may be some good opportunities for tax-loss harvesting, assuming the IRS will allow it. For example, sell Bitcoin at a loss and then use the proceeds to buy Ether. Or even transfer such proceeds to a brokerage account and buy stocks.

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