• Regulatory Agencies Address Virtual Currency
  • April 15, 2014 | Author: Katharine F. Musso
  • Law Firm: Jones Walker LLP - Birmingham Office
  • In remarks delivered on March 18, 2014, David S. Cohen, the Under Secretary for Terrorism and Financial Intelligence at FinCEN, warned of the various illicit finance risks presented by virtual currencies. Although the anonymity enjoyed by criminals using virtual currency for illegal trade is a well-known threat, Mr. Cohen says there are dangerous future threats to national security that have received less attention. Mr. Cohen notes, "for terrorist financiers, virtual currencies are understandably appealing: If funds could be swiftly sent across borders in a secure, cheap, and highly secretive manner, it would suit their needs well. Moreover, access to a fully anonymous—or even pseudonymous—currency would allow terrorists to better cover their tracks." At the same time, he acknowledges the current threat is low, "to be clear, we do not currently see widespread use of virtual currencies as a means of terrorist financing or sanctions evasion. The volatility associated with virtual currency, combined with its low capitalization and liquidity, has limited its appeal to these illicit actors. Terrorists generally need real currency, to pay their expenses—such as salaries, bribes, weapons, travel, and safehouses. The same is true for those seeking to evade sanctions. But these are adaptable actors who are drawn to ungoverned spaces and so may increasingly look to this technology as an attractive value."

    On March 25, the IRS issued guidelines on the tax treatment of virtual currency. In its notice the IRS stated:

    • Wages paid to employee using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
    • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.
    • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
    • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

    The IRS rules apply only to virtual currency which is "convertible" into a real currency or can be used in a real-world economy transaction.