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Extra Legal
Two Sides of the Same Bitcoin:
Why the Federal Government and the Judiciary
Should Treat Bitcoin Consistently as Virtual
Currency, not Property
By Cory Lamz *
I.
What is Bitcoin?
Bitcoin is two things: a virtual currency1 – it has real-world value and is used in e-commerce –
and a digital payment system. As a type of virtual currency, bitcoin is decentralized, meaning it has
Candidate for Juris Doctor, May 2017, Northeastern University School of Law.
The Internal Revenue Service (IRS) defines virtual currency as “a digital representation of value that functions as a
medium of exchange, a unit of account, and/or a store of value.” I.R.S. Notice 14-21. The utility of virtual currency rarely
exceeds the bounds of the digital world – e.g., a consumer is not able to use virtual currency as a substitute for legal
tender, like the dollar, the euro, or the peso, in a physical transaction, such as buying a burrito or a textbook. However,
the inverse is true: a consumer is able to use virtual currency as a substitute for the dollar, the euro, or the peso (or any
other foreign currency) in a digital transaction.
*
1
NE. U. L. J. Extra Legal (Spring 2015)
no central administering authority.2 The bitcoin system is comparable to the Federal Reserve Note
system currently used in the U.S. economy, in that the market values of both are driven by market
demand. Like the Federal Reserve Note, bitcoin is not backed by gold or silver.3 Instead, bitcoin’s
value is determined by its scarcity and demand in the market by the “variety of the merchants that
accept [bitcoin].”4 Yet unlike legal tender issued by the federal government, bitcoin is not issued
from a governmental body. In fact, bitcoin is not issued from a body at all, but rather by bitcoin
mining,5 one of the three ways to acquire bitcoin.
The second way to acquire bitcoin is via transaction. Bitcoin transactions do not require the
buyer or seller to disclose their identities to each other or to a third party, like a bank.6 Rather,
Matt Fuller, Middlemen cut out by internet in most industries, but not real estate, THE AMERICAN GENIUS, (Jan. 10, 2013),
http://agbeat.com/editorials/middlemen/.
3
Andrew Glass, Legal Tender Act passed, Feb. 25, 1862, POLITICO (Feb. 25, 2014, 12:09 AM),
http://www.politico.com/story/2014/02/this-day-in-politics-legal-tender-act-passed-feb-25-1862-103857.html; FAQ,
BITCOIN, https://en.bitcoin.it/wiki/FAQ#Where_does_the_value_of_Bitcoin_stem_from.3F_What_backs_up_Bitcoin.3F
(last visited Apr. 26, 2015).
4
FAQ, supra note 3.
5
Bitcoin mining is the process through which bitcoins are earned – bitcoins are mined, like gold or silver, and those who
work the hardest earn the most bitcoins. Like the California gold rush that began in 1848, the bitcoin miner who
expends the most on tools (software) reaps the greatest reward. Therefore labor is rewarded accordingly: bitcoin “miners
download software… to solve extremely complex mathematical problems… [and] are rewarded for these efforts with
some number of bitcoins.” Jeffrey D. Neuburger & Jonathan P. Mollod, The Exciting Present and Uncertain Future of Bitcoins
and Digital Currency, 31 WESTLAW JOURNAL: COMPUTER & INTERNET 23, 2, (Apr. 24, 2014). Within the bitcoin
mathematical construct, there is a fixed number of bitcoins available, 21 million, to be mined. Controlled supply, BITCOIN
WIKI, https://en.bitcoin.it/wiki/Controlled_supply (last visited Oct. 2, 2014). There were 12.6 million bitcoins in
circulation as of April 2014. Neuburger & Mollod, supra, at 2; U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-14-496, VIRTUAL
CURRENCIES: EMERGING REGULATORY, LAW ENFORCEMENT AND CONSUMER PROTECTION CHALLENGES 9 (2014). As time
passes and more bitcoins are mined, the difficulty of these mathematical problems increases correlative to the demand of
bitcoins. Twenty five bitcoins are mined every ten minutes, but this amount will decrease over time as mathematical
complexity and demand increase. Neuburger & Mollod, supra, at 2.
6
In traditional e-commerce, buyers and sellers disclose their identities by sheer use of their credit card number, login
information, or billing address. Marc Rennhard, Sandro Rafaeli, Laurent Mathy, Bernhard Plattner & David Hutchison,
Towards Pseudonymous e-Commerce, 4 ELECTRONIC COMMERCE RESEARCH 1-2, 83 (2004). Bitcoin transactions, by contrast,
require none of these. U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 5, at 6; Neuburger & Mollod, supra note 5, at 2.
2
buyers and sellers record the transaction in a public ledger7 using their respective bitcoin
addresses—which are pseudonymous8—in the public ledger to signify who sent and received the
bitcoin and in what quantity.
The third way to acquire bitcoin is via exchange. Bitcoin users may exchange dollars9 for
bitcoins – essentially digitizing the dollar so that it becomes virtual currency. However, the exchange
is not 1:1. The value of bitcoin, though volatile—because it is determined by the demand of the
market10—is currently greater than that of the American dollar. As of October 8, 2014, the bitcoin
was valued at $343.59.11 Thus, if the consumer wished to exchange her legal tender for bitcoins, she
would receive 1 bitcoin for every $343.59 exchanged, based on this same conversion rate. Bitcoin
exchanges also may convert bitcoins into other currencies. Thus, if Jill wanted to exchange her 1
bitcoin—perhaps acquired by mining—for euros, she could.12
The public ledger is known as a “blockchain” and also maintains transaction dates and times. U.S. GOV’T
ACCOUNTABILITY OFFICE, supra note 5, at 6.
8
The identifying information associated with bitcoin transactions is sometimes described as “pseudonymous” in that it
is possible after much research and data gathering for analysis techniques to link bitcoin addresses to personal identities.
Id.
9
Or any other type of government-recognized currency.
10
“Like other currencies, [bitcoin] is worth something partly because people are willing to trade it for goods and
services. Its exchange rate fluctuates continuously, and sometimes wildly. It lacks wide acceptance and is vulnerable to
manipulation by parties with modest funding. Security incidents such as website and account compromise may trigger
major sell-offs. Other fluctuations can build into positive feedback loops and cause much larger exchange rate
fluctuations. Anyone who puts money into Bitcoin should understand the risk they are taking and consider it a high-risk
currency. Later, as Bitcoin becomes better known and more widely accepted, it may stabilize, but for the time being it is
unpredictable.” FAQ, supra note 3.
11
Bitcoin Price Index, COINDESK, http://www.coindesk.com/price/ (last visited Oct. 8, 2014, 11:45 AM).
12
This exchange would not necessarily be for the same $343.59, as bitcoin’s value fluctuates quickly based on demand—
more evidence of bitcoin’s volatility. What is Bitcoin?, COINBASE, https://www.coinbase.com/what-is-bitcoin (last visited
April 7, 2015, 11:44 AM).
7
II.
Two Sides of the Same Bitcoin
Since the bitcoin system was proposed in 200813 and the first mining block was established in
early 2009,14 the United States has struggled to regulate the virtual currency system. Why? Because
the United States government does not quite understand yet how to regulate a virtual currency
system that is pseudonymous, untraceable, and—to date—associated with illicit bazaars like Silk
Road and Silk Road 2.0. Nevertheless, in recent years the United States has attempted to regulate
bitcoin through federal agency action and criminal charges.
In March 2013, the Department of the Treasury’s Financial Enforcement Network (FinCEN)
issued guidance on the use of virtual currency in e-commerce.15 This guidance effectively liberated
virtual currency users from the same regulations as “money service businesses”—or a person or
business offering currency exchange services (e.g., check cashing, money orders, travelers checks,
money transfers, and foreign currency exchange).16 The FinCEN guidance also distinguished virtual
currency from legal currency for tax purposes: “‘virtual’ currency is a medium of exchange that
operates like a currency in some environments, but does not have all the attributes of real currency.
The concept of bitcoin was first proposed by Satoshi Nakamoto. While it is speculated that Nakamoto is either a
pseudonym or collective of innovators, Nakomoto’s foundational argument for bitcoin is undisputed: “Commerce on the
Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic
payments… What is needed is an electronic payment based on cryptographic proof instead of trust, allowing any two
willing parties to transact” Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, SATOSHI NAKAMOTO INSTITUTE
(Oct. 31, 2008), nakamotoinstitute.org/bitcoin. Nakamoto suggests that the United States adopt the bitcoin system, in
some ways, as a response to the 2008 economic crisis and the varied trust in American banking. History, BITCOIN,
https://en.bitcoin.it/wiki/History (last visited Dec. 10, 2014). But the United States has been and continues to be leery
of the bitcoin system because, simply, it would seem to be beyond government control.
14
History, supra note 13.
15
U.S. DEP’T OF TREASURY, FINANCIAL CRIMES ENFORCEMENT NETWORK, FIN-2013-G001, GUIDANCE: APPLICATION OF
FINCEN’S REGULATIONS TO PERSONS ADMINISTERING, EXCHANGING, OR USING VIRTUAL CURRENCIES 1 (2013).
16
Id.; Money Services Business (MSB) Information Center, IRS, http://www.irs.gov/Businesses/Small-Businesses-&-SelfEmployed/Money-Services-Business-MSB-Information-Center (last updated Dec. 9, 2014).
13
In particular, virtual currency does not have legal tender status in any jurisdiction.”17 This means
that virtual currency is neither taxable nor a federally recognized accepted payment method—i.e.,
merchants may choose not to accept virtual currency as a payment method.18
Then, only a year later, in March 2014, the Internal Revenue Service (IRS) issued a notice that
declared virtual currency to be taxable as property.19 The property tax used for virtual currencies,
including bitcoin, is based on the virtual currency’s fair market value.20 Further, the IRS announced
that all virtual currencies, as property, are to be treated as capital assets (i.e., property held by the
taxpayer that may be taxed).21 These rulings arrived just in time for Tax Day 2014.
With these two announcements issued over the course of 12 months, the administrative
definition of bitcoin and other virtual currencies was clear: bitcoin is to be taxed as property, but the
U.S. DEP’T OF TREASURY, supra note 15, at 1.
The FinCEN guidance went on to declare that an administrator or exchanger of any currency – virtual or real—
however, “is an MSB under FinCEN’s regulations, specifically, a money transmitter, unless a limitation to or exemption
from the definition applies to the person… or [he is] a dealer in foreign exchange, under FinCEN’s regulations.” Id.
(emphasis in original). Thus, bitcoin users are implicated by this guidance under FinCEN’s definition of “money
transmitter.”
19
I.R.S. Notice 14-21, supra note 1, at 2 (e.g., “Virtual currency is not treated as currency that could generate foreign
currency gain or loss for U.S. federal tax purposes”); Danny Bradbury, What the IRS Bitcoin Tax Guidelines Mean for You,
COINDESK (March 26, 2014, 7:33 AM), http://www.coindesk.com/irs-bitcoin-tax-guidelines-mean/.
20
I.R.S. Notice 14-21, supra note 1, at 3. In the case of bitcoin and other volatile (i.e., virtual currencies that have varying
market demand and thus irregular changes to their fair market value) virtual currencies, the fair market value is
“determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be
converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.” Id.
21
26 U.S.C § 1221 (2010); I.R.S. Notice 14-21, supra note 1, at 3. This treatment can be beneficial to taxpayers: excess
losses, or the difference in capital gains (the cost incurred to the seller for selling the asset at a price higher than what
the same seller paid for it) and capital losses (the cost incurred to the seller for selling the asset at a price lower than
what the same seller paid for the asset) can be deducted from ordinary income up to $3,000 yearly. Tax Topics – Topic 409
Capital Gains and Losses, IRS, http://www.irs.gov/taxtopics/tc409.html (last visited Oct. 13, 2014); Kelly Phillips Erb, IRS
Says Bitcoin, Other Convertible Virtual Currency To Be Taxed Like Stock, FORBES (Mar. 25, 2014, 11:03 PM),
http://www.forbes.com/sites/kellyphillipserb/2014/03/25/irs-says-bitcoin-other-convertible-virtual-currency-to-betaxed-like-stock/. Likewise, capital gains are also taxable. I.R.S. Notice 14-21, supra note 1, at 3.
17
18
federal government is still going to refer to it as “virtual currency,” despite the term not carrying
legal weight.
This administrative definition starkly contrasts the judiciary’s treatment of bitcoin solely as
legal virtual currency in the criminal and civil actions it decided between 2010 and 2014. At no point
in the five cases that implicated bitcoin22 did the Court refer to bitcoin as anything other than
“virtual currency.”
Therein lies the legal issue with bitcoin: is bitcoin a type of virtual currency or a type of
property? Either definition of bitcoin also carries other issues—including tax and regulation issues.
The most critical issue related to the treatment of bitcoin is the criminal issue. How may bitcoin
users be charged criminally? And since no bitcoin-specific legislation currently exists, under what
laws may bitcoin users be charged?
Lawsuits included: CoinLab Inc. v. MT Gox KK, 513 B.R. 576 (W.D. Wash. 2014) (in which CoinLab Inc., a former
partner of MT Gox, a bitcoin exchange, alleged breach of contract); TradeHill, Inc. v. Dwolla, Inc., No. C-12-1082-MMC,
2012 WL 1622668, at *1(N.D. Cal. May 9, 2012) (in which TradeHill Inc., a bitcoin exchange, alleged wire fraud and
bank fraud under the federal Racketeer Influenced and Corrupt Organizations Act, as well as false advertising, breach of
contract, intentional misrepresentation, negligent misrepresentation, concealment, restitution after rescission,
conversion, and gross negligence against Dwolla, Inc., a money transfer service); Meissner v. BF Labs Inc., No. 13-2617RDR, 2014 WL 2558203 (D. Kan. June 6, 2014) (in which Martin Meissner, a bitcoin consumer, alleged breach of
contract, fraud, negligent misrepresentation, and deceptive acts and unconscionable acts under a Kansas consumer
protection statute against BF Labs, a manufacturer that specialized in producing technology used in the bitcoin mining
process); United States v. Donagal, No. CR 14-00285-JST (KAW), 2014 WL 4418192, at *2 (N.D. Cal. Sept. 8, 2014) (in
which Jeremy Donagal was charged with conspiring to manufacture and distribute controlled substances, possessing
with intent to distribute controlled substances, selling counterfeit drugs, and international money laundering using
Donagal’s own website and Silk Road and Silk Road 2.0 by accepting payments in the form of cash and bitcoins); and
SEC v. Shavers, 2014 WL 4652121 (E.D. Tex. Sept. 18, 2014) (in which Trendon Shavers operated an Internet-based
Ponzi scheme involving bitcoins).
22
III.
Bitcoin on the Silk Road
Transactions on Silk Road and Silk Road 2.0 are perhaps the greatest examples of bitcoin
being widely accepted as a form of payment and the effects of such use. Silk Road was a black market
bazaar accessible via the Deep Web.23 Silk Road offered up a variety of illegal goods for purchase:
drugs, fake IDs, fireworks, hacking software, firearms, and even, at one point, assassins. Silk Road
was created around January 2011 by Ross Ulbricht (also known by his user name “Dread Pirate
Roberts”), and was shut down by law enforcement in October 2013.24 In November 2013, the
marketplace launched again as Silk Road 2.0,25 offering similar illicit goods and services.26
On February 4, 2014, Ross Ulbricht was charged with conspiracy to traffic narcotics,
operating a continuing criminal enterprise, conspiracy to commit computer hacking, and conspiracy
to commit money laundering, all of which arose from his operation of Silk Road and its acceptance
of bitcoin as a payment method.27 These charges came almost two months before the IRS declared
bitcoin as property, on March 25, 2014. Nevertheless, a New York district court rejected defense
arguments regarding the money laundering charge on the very basis of bitcoin’s use:
[W]ith respect to Count Four [conspiracy to commit money laundering], [Ulbricht] alleges
that he cannot have engaged in money laundering because all transactions occurred through
the use of [b]itcoin and thus there was therefore no legally cognizable “financial transaction.”
This portion of the Internet was not accessible to common Internet users without specialized software for use with
Internet browsers. Lev Grossman & Jay Newton-Small, The Secret Web: Where Drugs, Porn and Murder Live Online, TIME
(Nov. 11, 2013), http://time.com/630/the-secret-web-where-drugs-porn-and-murder-live-online/.
24
United States v. Ulbricht, 31 F.Supp.3d 540 (S.D.N.Y. July 9, 2014).
25
Dylan Love, Drug Users Rejoice: The Silk Road Is Back Up And Running, BUSINESS INSIDER (Nov. 6, 2013, 2:43 PM),
http://www.businessinsider.com/silk-road-2-2013-11. As of April 2015, the owner of Silk Road 2.0 had not yet been
discovered.
26
Id.
27
Ulbricht, 31 F.Supp.3d, at 546-47.
23
The Court disagrees. Bitcoins carry value—that is their purpose and function—and act as a
medium of exchange. Bitcoins may be exchanged for legal tender, be it U.S. dollars, Euros, or
some other currency.28
Thus, the Court rejected the treatment of bitcoin as property and insisted bitcoin was a type of
virtual currency after all. But in doing so, the Court opened the door for any future bitcoin-related
criminal defenses. If the federal government treats bitcoin as property, criminal money laundering
charges involving bitcoin are not viable because, under the money laundering statute, it is not
possible to launder property.29 The reverse would also be true. A bitcoin user could not be charged
with tax evasion for failure to file their capital gains or losses in relation to bitcoin if the federal
government were to treat bitcoin as virtual currency.
IV.
Money Laundering vs. Tax Fraud
Under the current bitcoin landscape, the two different federal treatments of bitcoin lend
themselves to two distinct criminal charges for inappropriate bitcoin usage: money laundering or tax
fraud.
a.
Money Laundering30
Money laundering occurs when money is “earned from an illegal enterprise and the goal is to
give that money the appearance of coming from a legitimate source,”31 used in other financial
transactions as if it were legitimate money.32
Id. at 548.
18 U.S.C. § 1956 (2013).
30
Money laundering was made a federal crime in 1986 by the Money Laundering Control Act. 18 U.S.C. §§ 1956-1957
(2013).
28
29
Because bitcoin functions much like the other forms of money (i.e., legal tender) intended to
fall under the Money Laundering Control Act, money laundering charges33 are consistent with the
ways in which bitcoin are used today—in transactions. However, money laundering charges cannot
account for bitcoin users who do not transact with their bitcoins immediately upon acquisition, and
instead allow their bitcoins to either increase or decrease in fair market value—much like stock and
capital gains or capital losses.
b.
Tax Fraud
Tax fraud is a felony that occurs when any person “willfully attempts in any manner to evade
or defeat any tax”34 imposed upon them.35 Where users sit on their bitcoins and allow them to
increase or decrease in fair market these users could engage in tax evasion by treating bitcoins as
property, which would defeat taxes on the value of the bitcoins. However, given the rising number of
vendors, both real-world and virtual, that have begun to accept bitcoin as a form of payment in 2014,
including Home Depot, CVS, Kmart, Sears, Amazon.com, and Overstock.com,36 as well as Silk Road
2.0, there is perhaps less incentive to hold onto bitcoins than ever, especially as bitcoin’s fair market
value remains volatile.
Overview – Money Laundering, IRS, http://www.irs.gov/uac/Overview---Money-Laundering (last updated Feb. 4, 2015).
18 U.S.C. § 1956.
33
Criminal penalties for money laundering may include a fine no more than $500,000 or twice the value of goods or
services involved in the transaction, whichever is greater, or imprisonment for up to 20 years. 18 U.S.C. §§
1956(a)(1)(B)(ii) and 1956(a)(2)(B)(ii).
34
26 U.S.C. § 7201 (2013).
35
Criminal penalties for tax fraud may include no more than $100,000 (or $500,000 for corporations), imprisonment for
up to 5 years, or both, with prosecution costs. Id.
36
See infra note 38.
31
32
V.
Why the Federal Government Should Act to Harmonize Bitcoin Treatment
To date, the federal government has struggled to regulate bitcoin. Federal agencies purported
to regulate bitcoin as property beginning in March 2014. But in the Silk Road case, United States v.
Ulbricht, in July 2014, the Court rejected this notion and reaffirmed that bitcoin is a virtual
currency.37 In the wake of these treatments, bitcoin users are left to wonder what charges and
penalties they could face by inappropriately using bitcoin.
Determining how to treat bitcoin for legal purposes should be a high priority for the federal
government because inconsistency in the law only leaves room for more havoc, both in terms of
inter-branch governmental relations and governmental dealings with bitcoin users. Until all
branches of the federal government harmonize to treat bitcoin in the same way, bitcoin users may
continue to push the boundaries of e-commerce and even tax law, whether they intend to or not. As
a worst-case scenario, this might include more illicit transactions on Silk Road 2.0 or the like, and
failure to report capital gains and losses to the IRS, effectively overruling any attempts thus far at
regulation by federal authorities.
As e-commerce continues to grow in popularity within the U.S. and global economies, and
bitcoin becomes more widely accepted as a payment method,38 such widespread use of bitcoin may
Ulbricht, 31 F.Supp.3d, at 570
The Massachusetts Institute of Technology began accepting bitcoin as payment at its MIT COOP, which is “symbolic
of its commitment to serving a student culture of leaders and thinkers from diverse backgrounds globally.” See MIT COOP
Accepts Bitcoin Through BitPay, BUSINESS WIRE (Sept. 4, 2014, 9:30 AM),
http://www.businesswire.com/news/home/20140904005216/en/MIT-COOP-Accepts-Bitcoin-BitPay#.VGJGlUtGLVs;
see also THE COOP, http://store.thecoop.com (last visited Apr. 22, 2015). Likewise, Overstock.com was the first online
retailer to accept bitcoin as payment in January 2014. Cade Metz, The Experiment Goes Live: Overstock.com Is Now Accepting
Bitcoins, WIRED (Jan. 9, 2014, 1:47 PM), http://www.wired.com/2014/01/overstock-bitcoin-live. Interestingly, bitcoin
37
38
reach a point of no return. The use of bitcoin as a payment method may become so widely used in
coming years that it could combat real currency, such as the dollar or euro.39 Indeed, if bitcoin—a
volatile, unregulated, decentralized currency—were to become America’s second most widely used
form of currency, such positioning could have drastic effects on the economy and the market. The
bitcoin could, in turn, cause the market to be just as volatile as the bitcoin itself is. Likewise, as
bitcoin usage as a virtual currency grows, so may users’ indifference to the IRS’s declaration of
bitcoin as property. After all, if transacting with bitcoin is pseudonymous and nearly untraceable,
users may now also exchange their bitcoins for digital gift cards to be used at Home Depot, CVS, Kmart, Sears, and
Amazon.com via eGifter.com. Clare O’Connor, How To Use Bitcoin To Shop At Amazon, Home Depot, CVS And More, FORBES
(Feb. 17, 2014, 11:47 AM), http://www.forbes.com/sites/clareoconnor/2014/02/17/how-to-use-bitcoin-to-shop-atamazon-home-depot-cvs-and-more/. In March 2015, it is projected that the entire national population of Dominica, an
island in the Caribbean, will receive a “small amount of bitcoin… via text message” as part of attempts to increase
bitcoin adoption. Belén Marty, Dominica Will Be First Nation with Universal Bitcoin Possession, PAN AM POST (Aug. 28, 2014,
at 1:14PM), http://panampost.com/belen-marty/2014/08/28/dominica-will-be-first-nation-with-universal-bitcoinpossession/. “This effort will turn Dominica, and its more than 70,000 residents, into the most densely concentrated
bitcoin community in the world.” Id. One of the partners for the Dominica project is the Cryptocurrency College
Network of the Massachusetts Institute of Technology. Id.
39
Countries are beginning to take notice of bitcoin’s threat to their banking systems. The United Kingdom, for example,
issued a report – entitled “Digital Disruption: UK Banking Report” – in March 2015 that analyzes the impact of virtual
currencies and money transfer. BRITISH BANKING ASSOC’N, DIGITAL DISRUPTION: UK BANKING REPORT 41 (March 2015),
available at https://www.bba.org.uk/news/reports/digital-disruption-uk-banking-report/#.VTeTNvCiiSo. “As digital and
[virtual currencies] gain traction, the threat to bank’s free-income streams will grow… There are also risks as regulators
know all too well that currencies that operate outside the banking system also have the potential to be a refuge for those
who want to hide their identity or payments for illegitimate reasons.” Id.; see also Emily Spaven, British Banking Association:
Bitcoin is a Real Threat to Banks, COINDESK (March 27, 2015, 13:47), http://www.coindesk.com/british-bankingassociation-bitcoin-is-a-real-threat-to-banks/. In the United States at least, what may be attractive about the bitcoin
system – and what is threatening to banks – is the bitcoin system’s innovative and “Hydra”-like, decentralized nature,
whereas traditional banking “lacks innovation” and is highly regulated. Daniel Cawrey, Federal Bank VP: Bitcoin Threat
Means Banks Must ‘Adapt or Die’, COINDESK (Apr.1, 2014, 13:18), http://www.coindesk.com/federal-bank-vp-bitcointhreat-means-banks-must-adapt-die/. Additionally, the bitcoin system is more apt to respond to changing trends: “With
few or no legacy systems and greater responsiveness to customer needs (and with few requirements to offer full-service
solutions to non-profitable customers), [virtual currencies] can attract affluent, intelligent and profitable consumers.
These challengers are not looking to eat the whole meal. They will simply pick off the best bits.” KPMG, THE CHANGING
WORLD OF MONEY 3 (Jan. 2015), available at
http://www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Documents/PDF/Market%20Sector/Financial%
20Services/the-changing-world-of-money.pdf; see also Yessi Bello Perez, KPMG: Bitcoin a Threat and Opportunity for Retail
Banks, COINDESK (Jan. 19, 2015, 11:45 AM), http://www.coindesk.com/kpmg-bitcoin-threat-opportunity-retail-banks/.
bitcoin users would not need to be concerned with any consequence, whether it be a tax
consequence or a lawsuit.
Thus, the federal government faces a complicated issue: treat bitcoin as property and charge
tax evasion by bitcoin users who fail to report capital gains or losses, or treat bitcoin as virtual
currency and charge money laundering by bitcoin users who use bitcoin to fund illicit transactions.
VI.
Conclusion
Due to the pseudonymous nature of bitcoins and the internet at large—as well as the
pseudonymous nature of the blockchain and bitcoin wallets40—it is nearly impossible to locate and
identify which internet users possess bitcoins, how many bitcoins, and for what duration.41 It also
may be difficult to trace bitcoin users (identified only by avatars or user names) to their real-world
counterpart with current technology.42 Therefore, treating bitcoin as property is impractical.
Relatedly, it is a waste of time and resources for the federal government to charge a bitcoin user with
tax fraud without both knowing the bitcoin user’s real identity and the unreported capital gains or
losses of her bitcoins, as determined by the number of bitcoins in possession and the fair market
value of these bitcoins. Unlike money laundering charges, which may trace transaction histories, tax
fraud charges are not possible under current methods and technology unless bitcoin users voluntary
turn themselves in.
Where a bitcoin user may store her bitcoins. Kyt Dotson, Bitcoin Weekly 2014 December 3: Bitcoin Foundation copycat fraud
sites, MasterCard speaks against BTC in Australia, ChangeTip $3.5m seed funding, SILICONANGLE (Dec. 3, 2014),
http://siliconangle.com/blog/2014/12/03/bitcoin-weekly-2014-december-3-bitcoin-foundation-copycat-fraud-sitesmastercard-speaks-against-btc-in-australia-changetip-3-5m-seed-funding/.
41
Anonymity, BITCOIN WIKI, https://en.bitcoin.it/wiki/Anonymity (last visited Apr. 22, 2015 at 7:08 p.m.).
42
Id.
40
On the other hand, treating bitcoin as virtual currency is consistent with bitcoin’s common
usage: transacting. Moreover, treating bitcoin as a virtual currency is harmonious with prior state-tostate jurisprudence.43 The correlated criminal charge, money laundering, is a charge that is both
practical and more realistic than tax fraud because the federal government has the capabilities to
identify the guilty party and other information related to the charge, as illustrated in Ulbricht44 and
Shavers,45 and because tracing bitcoin usage by transaction is actually possible.
In conclusion, the federal government should do away with the IRS’s declaration defining
bitcoin as property and instead enforce and regulate bitcoin as a virtual currency, subjecting bitcoin
to money laundering laws—permitting the federal government to continue pursuing money
launderers and illicit transactions—and the same rules and procedures as other virtual currencies,
including taxation upon realization.46 Taxing bitcoin upon realization would lead to less confusion in
the market, a better understanding of possible criminal penalties, and an increase in vendors
accepting bitcoin. And with more vendors accepting bitcoin, more legitimate spending would likely
See CoinLab Inc., 513 B.R. at 576.
Ulbricht, 31 F.Supp.3d 540.
45
See Shavers, 2014 WL 4652121at *1.
46
A transaction is realized at the point in which the virtual currency transacted is exchanged for a real or virtual good or
service. For example, when Jill uses 30,000 frequent flyer points to buy a flight from Boston to Los Angeles, the
transaction is realized when the exchange occurs – when her points are deducted from her account and her flight is
confirmed. For realizations of a transacted good or service, the transaction would be taxed using a sale, service tax, or
any other applicable consumption tax. See Darrell L. Oliveira, The Taxability of Frequent Flyer Credits Earned by Employees:
Why the IRS Has Remained Silent on the Issue, 4:3 U. PA. J. LAB. & EMP. L. 643-47 (2002). For realizations of a money
exchange, the exchange would be taxed in the same way that money service businesses (MSBs) are currently taxed, using
a currency transaction tax. In instances where bitcoins are exchanged for gift cards or online transactions, the bitcoins
themselves would not be taxed, but the goods purchased would be.
43
44
occur, leading to a less volatile bitcoin, a spur in e-commerce, and a stronger trust in the American
economy.47
47
Ironically, this was Nakomoto's proposal for bitcoin from the very beginning. See Nakamoto, supra note 13.

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