Paul L. Caron

Monday, February 8, 2016

Chodorow Presents Bitcoin, Foreign Currency, And The Case For Basis Pooling Today At Pepperdine

Chodorow (2014)Adam Chodorow (Arizona State) presents Bitcoin, Foreign Currency, and the Case for Basis Pooling at Pepperdine today as part of our Tax Policy Workshop Series.  The Pepperdine Tax Policy Workshop Series funded in part by a generous gift from Scott Racine:

The IRS recently dealt a blow to bitcoin enthusiasts by ruling that Bitcoin and other similar currencies should be treated as property – and not foreign currency – for income tax purposes. As a result, those who use bitcoin to purchase goods or services must report gain or loss on each transaction if the bitcoin has changed value between the time it was acquired and spent. The IRS’s decision seems correct as a matter of positive law, but laws can always be changed.

In this Article I consider whether bitcoin should be treated as a foreign currency for income tax purposes, which would permit bitcoin users to take advantage of the personal use exemption that applies to such currency. I conclude that it should not because the rationale for extending the personal use exemption to bitcoin is weak, at least from the government’s perspective. Moreover, expanding the definition of foreign currency could create significant line-drawing problems.

I also consider the IRS’s decision to apply traditional basis rules to Bitcoin. Under this approach, each bitcoin has its own basis, which allows taxpayers to manipulate their tax gains and losses, without affecting their economic position, by deciding which coins to spend. The rise of bitcoin offers a rare opportunity to re-examine the basis rules for all fungible assets. I argue that taxpayers should be required to pool the basis of their bitcoins to ensure that tax gains and losses match realized gains and losses, and that such a rule should be extended to stocks, bonds, and inventory as well. At the very least, bitcoin users should be allowed to adopt a formulaic approach to basis, as is allowed for many fungible assets.

Update:  Post-workshop lunch (with special guest David Elkins (Netanya College School of Law)):


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