By Emma Betz, Staff Writer
As much in our world has evolved, there is a strong demand for virtual developments. Recently, there has been a growing medium of exchange – cryptocurrency. Cryptocurrency, otherwise known as digital or virtual currency, is a medium of exchange not technically considered regular money.[1] Dissimilar to money, cryptocurrency is not issued by any federal or governmental bank, and this lack of physicality can make many people question its effectiveness its ability to be taxed as other forms of currency regularly are.[2]
Bitcoin, and other cryptocurrencies are a form of digital currency used in electronic payment transactions that involve no means of a physical presence to the person receiving them or to the person who is in possession of them.[3] Each digital transaction is recovered in a virtual public ledger called the “blockchain,” which is maintained by “miners,” who can be any person who has invested in the hardware required to quickly process complex computations.[4] Miners are then awarded digital currency, such as Bitcoin, Ripple, Dogecoin, and Litecoin, in exchange for verifying and adding the virtual transactions to the blockchain.[5]
Today, thirty-three states have pending legislation in the 2021 legislative session and seventeen states have enacted legislation or adopted resolutions to issues dealing with cryptocurrency and what cryptocurrency is in relation to physical money. For example, Pennsylvania House Bill No. 1724 “establishes a task force on digital currency and the impact on widespread use of cryptocurrency and other forms of digital currencies”.[6]
A question that often arises regarding cryptocurrency is how virtual currency is treated for Federal income tax purposes. In 2014, the Internal Revenue Service (IRS) issued Notice 2014-21, 2014-16 I.R.B. 938, which asserts that virtual currency is a taxable entity and is to be treated as property, thus acknowledging that the sale or exchange of virtual currency to pay for goods or services can have consequences that may result in a tax liability.[7]
As a consequence of the IRS declaring virtual currency as taxable property, “every individual or business that owns cryptocurrency will generally need to: (i) keep detailed records of cryptocurrency purchases and sales; (ii) pay taxes on any gains that may have been made upon the sale of cryptocurrency for case, (iii) pay taxes on any gains that may have been made upon the purchase of a good or service with cryptocurrency, and (iv) pay taxes on the fair market value of any mined cryptocurrency, as of the date of receipt.”[8]
Because legal frameworks tasked with regulating cryptocurrency were written before any virtual currency existed, legal issues are prone to arise when it comes to the taxation of virtual currency.[9] Aside from taxation, the other legal issues that have risen include the legal rights and obligations of corporate and private individuals, contractual issues, insuring cryptocurrency, fraud, and cryptocurrency theft.[10] With a trend in society as prominent as cryptocurrency, future legal implications of digital currency are likely to evolve and there will be a growing demand for solving issues relating to virtual currency.
[1] https://www.ncsl.org/research/financial-services-and-commerce/cryptocurrency-2021-legislation.aspx
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21
[7] Id.
[8] https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/usa
[9] https://www.forbes.com/sites/theyec/2019/04/08/the-current-and-future-implications-of-cryptocurrency-for-the-legal-industry/?sh=24fa8d8568f9
[10] Id.
