Bitcoin Regulation Roundup: Rumours, Court Cases and Taxing Times

Regulatory attitudes towards cryptocurrencies around the world are shifting. Hardly a day goes by without a central bank issuing a warning on the digital currency. However, it’s not all bad news – as some authorities are taking a much more positive approach.

In CoinDesk’s regulation roundup, Certified Public Accountant and ACFE Certified Fraud Examiner Jason Tyra examines the most significant digital currency news from the world’s regulators and law courts over the past two weeks.

USA: Bitcoin is property, says IRS

The US Internal Revenue Service issued a notice in late March that classified bitcoin as property for purposes of taxation, clarified that mined bitcoins are taxable at the time they are received, and specified that bitcoins received in connection with a trade or business or as wages are subject to withholding and/or payment of Medicare or social security taxes.

The reaction among US bitcoiners was mixed. Treatment as a capital asset grants access to preferential capital gains rates for bitcoins held longer than a year and a day, but imposes the burden of tracking basis and gain for every bitcoin received or spent.

This is good news for US taxpayers using bitcoin as a store of wealth, but terrible news for those who might use it as a means of exchange.

The subtleties and implications of the IRS notification are likely to fuel debate among US bitcoin enthusiasts for months to come: for example, the IRS did not specify whether taxpayers exchanging bitcoins for other crypto-currencies would be entitled to defer taxable gain under like-kind exchange rules.

Rejection of non-functional (otherwise known as 'foreign') currency treatment by the IRS has also created uncertainty as to the implications, if any, for FinCEN’s designation of bitcoin as a monetary instrument.

USA: Texas following NY example?

The Texas Department of Banking released a letter this week addressed to “virtual currency companies operating or desiring to operate in Texas” that declared that, “because cryptocurrency is not money under the Money Services Act, receiving it in exchange for a promise to make it available at a later time or different location is not money transmission” in the state.

However, since the Texas Department of Banking is a state-level agency, its declaration has no impact on FinCEN’s federal registration requirements.

Texas has aggressively cultivated a business-friendly climate in recent years, poaching a number of high-profile companies from higher tax and higher regulation states. Austin, Texas is especially well known as a progressive hub for technology companies, including many bitcoin startups.

USA: If bitcoin isn't money, can it be laundered?

On 1st April, the attorney for Ross Ulbricht, alleged mastermind of the now defunct contraband trading site known as Silk Road, submitted a motion to dismiss some of the charges against his client on the grounds that “bitcoins are not money”, thus obviating the possibility that money-laundering statutes could apply.

Denmark: Yippee, no taxes

After months of delays, Denmark declared last week that bitcoin trades by individuals are exempt from taxation in that country.

The Danish taxing authority based its decision on the novel idea that bitcoins cannot be considered 'real' money, essentially rendering bitcoin activity (gains and losses alike) a non-event from a tax perspective. However, bitcoin-related businesses will be subject to normal income tax rules on gains booked in the normal course of business.

At the time of the announcement, Denmark was thought to be the only country in the world that has definitively taken a pass on taxing bitcoin. Early reactions by European bitcoiners were positive, though the wider implications of the announcement have yet to be seen. If bitcoins are not 'real', do they still enjoy protection as private property?

Bulgaria: Tax loophole?

Taking the opposite position from Denmark, the Eastern European nation of Bulgaria announced this week that bitcoin trading would be subject to ordinary income and corporate income tax rates, but did not issue regulations requiring gains to be documented or reported, raising the issue of potential money laundering through digital currencies.

In response, one commentator, Bulgarian enthusiast Stamen Gorchev, suggested that the country might join other EU members in looking to European regulators to draft more comprehensive regulation.

Bulgaria’s announcement means that bitcoiners now have the full spectrum of potential tax treatments available to them in western countries, creating potentially lucrative transfer pricing opportunities for companies with the resources to exploit them.

China: Rumours of bank crackdown

Bitcoin isn’t really banned in China, or is it? Rumors of an imminent crackdown in China continue to dog bitcoin, as well as altcoins.

Just as much of the appreciation in price during the latter half of 2013 was attributed to wider adoption and investment by the Chinese, possible regulatory action by the Chinese government or central bank have also been blamed for bitcoin’s recent decline.

Though the precise reason for the allegedly imminent crackdown is not known, bitcoin’s fungibility is likely to threaten capital controls to some extent in the nominally Communist state.

Additionally, its network is thought to be highly resistant to the kind of government control and censorship that have long plagued Chinese internet users.

Colombia: Bitcoin ban?

Colombia’s Ministry of Finance, in cooperation with the country’s central bank and Superintendancy of Finance, may ban bitcoin transactions, according to a report by Colombian publication El Tiempo.

Colombia recently joined the growing list of nations that have warned their citizens away from bitcoin, advising citizens that they are not backed by the Colombian central bank.

The government’s objection is unlikely to relate to bitcoin’s novelty, as the South American country is not known for the kind of financial innovation that is likely to be a destabilizing influence on its economy. Rather, the issue is likely to be bitcoin’s potential criminal uses.

Colombian security forces continue to struggle with the twin issues of narco-trafficking and Communist rebels, both of whom may see value in bitcoin as a means of payment for illicit transactions.

However, barring Colombian banks from handling bitcoin-related business is unlikely to have a significant impact on organizations that are essentially international in their conduct of business (narcotics for export and weapons for import).

Isle of Man: No licence required

On 26th March, the Isle of Man has announced that its licensure requirements do not apply to bitcoin exchanges operating there.

The Financial Supervision Commission, the Isle of Man’s financial regulator, confirmed in a written statement that bitcoin exchanges are neither investment businesses nor money transmission services as defined by current law.

The island is a self-governing dependency of the United Kingdom, and its citizens are nominally British citizens. Furthermore, it is known as an offshore haven due to its unusually low tax rates, which include a cap on tax payable by individuals and a corporate tax rate of 0%.

Liberal banking and tax rules have made offshore banking a large part of the island’s economy.

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