By now, most CPAs have heard of Bitcoin. Bitcoin and other similar currencies—there are dozens—are not issued by a central bank; instead, they are created, or “mined,” by a group of anonymous programmers. This form of online cash is nothing more than software code, but people can use it to buy tangible items—for example, online retailer Overtstock.com accepts bitcoins as payment. Users around the world can exchange digital currencies for traditional currencies through these servers—a virtual version of exchanging dollars for euros when traveling in Paris. It is an open-source system, much like the Internet itself. Some of your clients may even be exchanging goods or services using digital currency.
Regulating Digital Currencies
The future of virtual currencies is being put to the test after the New York Times reported that one of the largest Bitcoin exchanges, Mt. Gox, was about to file for bankruptcy and that the exchange had lost 6% of the bitcoins in circulation (about 744,000 of 12.4 million) in an alleged theft that had gone unnoticed for years (Nathaniel
Popper and Rachel Abrams, “Apparent Theft at Mt. Gox Shakes Bitcoin World,” Feb. 25, 2014). Whether or not Bitcoin survives, the regulation of digital currencies remains a long-term question.
This type of payment network is currently decentralized and unregulated in the United States. But New York State Department of Financial Services Superintendent Benjamin M. Lawsky is looking to change that—at least in this state. (Meanwhile, Canada has announced that it will soon be drafting anti-money laundering standards around virtual currencies, but has not recognized Bitcoin as legal tender.)
Last August, the New York Financial Services Department issued a public notice that it was launching an inquiry into appropriate regulatory guidelines for virtual currencies, and it followed up that announcement with public hearings in January. In early February, at a forum on virtual currencies in Washington, D.C., Lawsky announced that his office would be drafting regulations this year that would include a license requirement for businesses conducting transactions in virtual currency, but he did not give a definitive timeline.
But New York CPAs' challenges with Bitcoin may have already begun. The federal government has been mostly silent on the virtual currency. In May 2013, the Government Accountability Office urged the IRS to issue guidance in order to reduce tax compliance risk, but now CPAs are in the midst of the current busy season without it.
“Some of this speculation is incorrect, incomplete, or misleading,” the IRS's Taxpayer Advocate Service said in a 2013 report to Congress, describing the type of guidance that “experts” have been providing. “It is the government's responsibility to inform taxpayers about the rules they are required to follow.”
The IRS said it is aware of the compliance risks posed by Bitcoin and other virtual currencies, is studying them, and will provide guidance; however, it has not provided any definitive timeline, according to an article in the National Journal (Catherine Hollander, “How Is Bitcoin Taxed? The IRS Doesn't Know”).
Implications for CPAs
If you think this is not something CPAs have to think about just yet, consider that CPAs need guidance now, and they are best equipped to provide suggestions for such guidance to regulators as they draft legislation. Because of this, the NYSSCPA established a Virtual Currency Task Force in February. It will research all aspects of digital currency, including international and money-laundering implications, and will provide guidance to regulators and other stakeholders in this emerging digital economy.