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IRS acknowledges crypto is currency in some places, but reiterates it's not in U.S.

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Photo by Alesia Kozik

The devil is in the details, especially when it comes to taxes. That's why the Internal Revenue Service today updated its almost decade-old guidance on cryptocurrency.

Specifically, the IRS clarified that while Uncle Sam doesn't consider crypto as a currency, other jurisdictions do. In its Notice 2014-21, the IRS stated that digital currencies were not legal tender. Nine years later, however, the IRS acknowledges that other countries have officially recognized Bitcoin as legal tender.

"Thus, the sentence in the background section of Notice 2014-21 stating that virtual currency does not have legal tender status in any jurisdiction is no longer accurate as to Bitcoin," said the IRS in today's Notice 2023-34.

In addition, the IRS tweaked the background section of the 2014 notice to note that —

"In certain contexts, virtual currency may serve one or more of the functions of 'real' currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but the use of virtual currency to perform 'real' currency functions is limited."

But still property in U.S.: That limited usage as currency is why the IRS also points out that its original Notice 2014-21 designating that convertible virtual currency be treated as property for federal tax purposes remains in effect.

And the new notice specifically states that this Bitcoin background clarification does not change the general tax principles that apply to property transactions, which is what crypto transactions are considered under U.S. tax law.

Specifically, says the IRS, the recognition of foreign nations' acceptance of crypto as legal tender does not change how the IRS treats, for tax purposes, virtual currency transactions.

As noted in IRS.gov's frequently asked questions about crypto and taxes, the answer to question 2 as to how virtual currency is treated for federal income tax purposes, remains —

"Virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency."

So when you do answer "yes" to the top of Form 1040 question about whether, at any time during the prior tax year, you conducted a digital asset transaction, you'll still report that as a capital gain or loss, not as ordinary income earned or otherwise received.

Capital gains, losses, and reporting hassles: On the one hand, that's good news. Profitable sales of virtual assets are taxed at the usually lower capital gains rates. And losses, while subject to any limitations on the deductibility of capital losses, can be used to offset gains.

But it requires more record keeping and tax form filing.

Maybe one day, Uncle Sam will recognize the ability of crypto aficionados to use the digital assets in lieu of U.S. dollars to pay for groceries or lattes. That will simplify the current reporting of such transactions as taxable capital gains or losses.

But, as noted by IRS notice, although that day may have arrived elsewhere, it isn't here yet.

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