In Notice 2014-21, the IRS announced its position that cryptocurrencies constitute property for tax purposes, rather than foreign currency, and observed that while cryptocurrency may operate like “real” currency in some environments, it “does not have legal tender status in any jurisdiction.” El Salvador’s adoption of Bitcoin as legal tender in 2021 made that statement factually incorrect and led some taxpayers to question whether Bitcoin might now qualify as currency for tax purposes. Notice 2023-34 answers that question in the negative and clarifies that the IRS views cryptocurrency as property (rather than currency) even when another jurisdiction has adopted it as legal tender.
Specifically, Notice 2023-34 revises Notice 2014-21 by replacing the specific “legal tender” language referenced above with a general observation that cryptocurrency “may serve one or more of the functions of ‘real’ currency – i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance – but the use of virtual currency to perform ‘real’ currency functions is limited.” Notice 2023-34 does not otherwise alter Notice 2014-21’s conclusion that cryptocurrency cannot generate non-taxable foreign currency gain or loss for U.S. federal tax purposes.
While the IRS position remains clear that cryptocurrency is property, neither Notice provides guidance on when, if ever, the IRS would treat a cryptocurrency as foreign currency for tax purposes. The “legal tender” requirement is likely necessary but is clearly not sufficient, presumably because the cryptocurrency is not issued by a central bank. However, even if countries began issuing their own cryptocurrencies, there are no guarantees that the IRS would not continue to deny currency status on some other theory. Further complicating matters, Notice 2023-34 restates prior IRS guidance that cryptocurrencies pegged to the United States dollar or other foreign currencies may not be subject to the same rules applicable to unpegged cryptocurrencies, without taking a position on whether these cryptocurrencies would be treated as currency and not property. Consequently, until definitive cryptocurrency regulations are promulgated, when, if ever, cryptocurrency can be classified as currency for tax purposes will likely remain uncertain.
