Rep. Stockman Introduces Bill Regarding Tax Treatment of Virtual Currencies

May 7, 2014. Rep. Steve Stockman (R-TX) introduced HR 4602 [LOC | WW], the "Virtual Currency Tax Reform Act", a bill to treat virtual currencies as foreign currency for tax purposes, and to impose a five year moratorium on capital gains taxation of virtual currencies. There are no cosponsors.

This bill is a response to the release of two documents by the Internal Revenue Service (IRS) on March 25, 2014, that state that virtual currencies, such as Bitcoin, are property, rather than currency, for tax purposes.

See, IRS document titled "IR-2014-36: IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply", which references a second IRS document [6 pages in PDF] titled "Notice 2014-21".

See also, story titled "IRS States that Virtual Currencies are Property for Tax Purposes" in TLJ Daily E-Mail Alert No. 2,636, March 25, 2014.

Bill Summary. This bill states that "Congress finds that classifying virtual currencies as property subjects users to capital gains tax on any transaction using the virtual currency based on any gain or loss relative to the change in the virtual currency's value from the time of purchase."

It then provides that the IRS "shall treat virtual currencies as a foreign currency for Federal tax purposes".

It also provides that "For a period of five years following the date of the enactment of this Act, the Federal Government shall not impose, assess, collect, or attempt to collect capital gains tax on virtual currencies."

Finally, this bill states that "Nothing in this Act shall prevent, impair or impede the operation of any government agency, authority, or instrumentality, whether of the Federal Government or of any State or political subdivision thereof, to enforce currently existing criminal, civil, or taxation statutes and regulations."

The bill was referred to the House Ways and Means Committee (HWMC).

Rep. Stockman and HR 4602's Prospects for Enactment. Rep. Stockman represents a district that runs from Houston to Beaumont, Texas. The main industry in his district is oil and gas. He is a member of the House Foreign Affairs Committee (HFAC). Rep. Stockman also served in the House for one term two decades ago. In the 1994 election he unseated former Rep. Jack Brooks (D-TX), who was the Chairman of the House Judiciary Committee (HJC) at the time. Former Rep. Nick Lampson (D-TX) then defeated Rep. Stockman in the 1996 election.

Rep. Stockman is not a likely person to move a bill of this nature. First, the HWMC has jurisdiction over this bill. He is not a member of the HWMC.

Second, he is leaving the House at the end of the 113th Congress. This means not only that he will not be around to reintroduce this bill in the 114th Congress, but also that his colleagues now perceive him as a lame duck legislator.

Third, even if the House were to pass this bill, enactment would also require Senate passage. The committee with jurisdiction is the Senate Finance Committee (SFC). Sen. John Cornyn (R-TX) is a member. Rep. Stockman just challenged, and lost to, Sen. Cornyn in the Texas Republican Senate primary.

Rep. Stockman (at right) compelled Sen. Cornyn to expend much U.S. currency and political currency that he would have preferred to save for the general election in November.

Fourth, Rep. Stockman has no background in information technology, financial services, or taxation. And, he does not sit on any of the committees that engage in oversight and legislation in any of these areas. He lacks expertise.

Fifth, he is unlikely to get any support from the Obama administration. Not only is President Obama loath to work with House Republicans, but Rep. Stockman has proposed impeachment of President Obama.

Yet, even if this bill were sponsored by Representatives more suitable for the task, it would still be most difficult to enact.

Bitcoin and other virtual currencies have the potential to displace certain commercial financial transaction services. Or at least, they could diminish the revenues of the businesses that provide these services. As heavily regulated businesses, they have large and capable government relations and lobbying arms. Established incumbent financial services businesses, like many businesses in other regulated industry sectors, are skilled in the art of manipulating the actions of regulatory agencies and the Congress in ways that prejudice new technologies and start up companies that threaten their established revenue streams and ways of doing business.

These virtual currencies also have the potential to reduce the reach of regulatory agencies, and the data surveillance capabilities law enforcement and intelligence agencies. Hence, these government entities have incentives to undermine viability of virtual currencies.

In short, virtual currencies cannot reasonable expect assistance from the Congress or regulatory agencies. Rather, they should be watching their backs.

(Published in TLJ Daily E-Mail Alert No. 2,658, May 12, 2014.)