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Taxing and Regulating Bitcoin: The Government’s Game of Catch Up

August 22, 2014

This paper, written by Catholic University’s Columbus School of Law scholar Patrick McLeod, examines how government regulation lags behind the evolution of digital cryptocurrencies.

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This paper, written by Catholic University’s Columbus School of Law scholar Patrick McLeod, examines how government regulation lags behind the evolution of digital cryptocurrencies, and how the lack of regulatory precision affects consumers.

McLeod writes that a lack of clarification from federal agencies, such as the Internal Revenue Service, (IRS) about how existing tax reporting regulations apply to cryptocurrency should be interpreted as a clarification that the regulations do not apply.

“There are many different actions that a taxpayer can take to satisfy the willful element, but when taxpayers have no reference as to whether they are receiving taxable income, then they arguably cannot be taking any affirmative action to evade that tax liability,” McLeod wrote. “Failure to report by itself does not constitute tax evasion. The IRS has failed to provide much guidance concerning Bitcoin. Therefore, Bitcoin exchange users should not currently be susceptible to punishment for not reporting their Bitcoin holdings under tax evasion laws.”

McLeod writes that governments should consider how cryptocurrency differs from physical currency, and treat it accordingly.

“Bitcoin is an innovative system, even though it currently operates in a legal gray area,” McLeod wrote. “The Government should consider its nature, an intentional detachment from centralized or institutional financial systems, when the inevitable regulation of it proceeds. If the Government seeks to tax Bitcoin, it will have to approach this regulation in a unique way due to the administrative issues of collecting these taxes. Financial instruments, specifically commodities, are the closest semblance to Bitcoin; as such, this classification for taxation should serve as a basis for any legislation moving forward. In the absence of explicit tax legislation, it is the government’s duty to exempt Bitcoin users from prosecution for tax evasion because it is unclear as to what taxes they are actually evading.”