Legal Implications Surrounding Bitcoin

June 22, 2017

Bitcoin has been making its way into the news and into legal discussion for the past couple years and more so now as its value continues to rise. Bitcoin is a decentralized, virtual, form of currency, created in 2009. Bitcoin is decentralized because it is not monitored, controlled, or administered by any legal or governmental entity. Over the past six months the price of Bitcoin has tripled in value despite daily fluctuations of up to $300.

A recent news article, You can’t hold a bitcoin, but the web currency’s value has skyrocketed. Why?, states:

The rise comes in spite of headwinds. U.S. regulators have sent confusing signals about their views on bitcoin. The Internal Revenue Service sees bitcoin as a form of property, while the Financial Crimes Enforcement Network at the Treasury Department views it as a virtual currency that is a gift to money launderers. Adding to the confusion, the U.S. Commodity Futures Trading Commission has ruled that bitcoins and other digital currencies are commodities. The Securities and Exchange Commission rejected two different exchange traded funds based on bitcoin in March, asserting that bitcoin markets are largely unregulated and thus subject to fraud and manipulation.

In 2014, the IRS made the decision to classify Bitcoin and virtual currencies as a form of property. The IRS stated, “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.” And, in response to a whether a taxpayer who receives virtual currency as payment for goods or services must include, in computing gross income, the fair-market value of the virtual currency, the IRS stated: “Yes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received. See Publication 525, Taxable and Nontaxable Income, for more information on miscellaneous income from exchanges involving property or services.”   Further remarks in response to frequently asked questions can be found here.

In addition to the above cited agencies’ treatment of virtual currency and bitcoin, many other areas of the law still need to assess how to treat this virtual currency – one of which is Bankruptcy. In an article from the Emory Bankruptcy Developments Journal, Chelsea Deppert addresses the need for bankruptcy courts to decide what to do with Bitcoins:

Because the Code affords different protections to assets classified as a currency and assets classified as a commodity, the determination of whether bitcoin is a currency or a commodity will dictate bitcoins’ treatment in bankruptcy. If bitcoins were classified as currency, bitcoin transactions would receive greater protections, including certain immunities from both the automatic stay and being deemed a constructive fraudulent transfer. On the other hand, if bitcoins were classified as a commodity, the Code would not automatically afford such protections, generally only extending substantial protections to those bitcoin transactions that constitute a ‘forward contract.’ A ‘forward contract’ is made in the limited circumstances when the parties to a bitcoin transaction contractually agree that the bitcoins will be delivered at least two days before their payment is due.

To date, there has not been a bankruptcy case clearly and definitively classifying Bitcoin as either currency or commodity.

Watching the development of Bitcoin in various legal fields will be both a necessary and fruitful endeavor as it continues to gain popularity and value.

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Image credit: REUTERS/Benoit Tessier