Bitcoin and the Definition of Foreign Currency

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 bitcoins to purchase goods or services must report gain or loss on each transaction if the bitcoins have changed value between the time they were acquired and spent. Treating Bitcoin as a foreign currency would have permitted individuals to take advantage of the personal use exemption, which could facilitate Bitcoin's adoption, and required taxpayers to adopt a formulaic system for tracking the basis of commingled bitcoins. 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. I conclude that tax authorities should not classify Bitcoin as a foreign currency because (1) expanding the definition could create significant administrative and line-drawing problems, and (2) it is not in the government's interest to promote Bitcoin or other alternate currencies. Nor should authorities simply extend the personal use exemption to Bitcoin. In contrast, authorities should extend the basis rules applicable to foreign currency to Bitcoin to relieve taxpayers of unnecessary administrative hassles and prevent them from using the basis rules to improperly reduce their tax obligations