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While most people think of government-issued money, there are now over 1,000 privately-issued currencies in the United States, Carol R. Van Cleef, a partner in the D.C. firm of LeClair Ryan, reported to the Regional Meetings. Although few of the meetings’ attendees indicated they currently own such currencies, she assured them that the millennial and post-millennial generations are getting into digital currency and it is becoming the way of doing business. The IRS has defined 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.” Bitcoin was created in 2008 by a person or group named Satoshi Nakamoto that believed “what is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”

Ms. Van Cleef noted: There is a question of into which regulatory bucket virtual currency falls: Is it a commodity, security or something else? Since 2014 the Securities and Exchange Commission has been studying cryptocurrency and has taken the position that initial digital coin offerings are securities. The SEC has even set up a website to teach people what is fraudulent behavior in this area, Ms. Van Cleef reported. (See https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-initial-coin-offerings)

The Commodity Futures Trading Commission in 2015 decided that virtual currencies are properly defined as commodities. According to the CFTC: “There is no inconsistency between the SEC’s analysis and the CFTC’s determination that virtual currencies are commodities and that virtual tokens may be commodities or derivatives contracts depending on the particular facts and circumstances.”

For accountants, the use of cryptocurrency raises many issues in the areas of taxation, estate planning and regulation, Ms. Van Cleef pointed out. How should a portfolio of digital currency be valued and when? How should gains be treated for tax purposes? The IRS has said that each transaction in digital currency should be treated separately and capital gains reported. “This means a lot of companies are getting very nasty tax bills,” Ms. Van Cleef commented. She noted the SEC has been very critical of lawyers and accountants for not showing enough leadership in the developing cryptocurrency world. The use of virtual currency “is a paradigm shift” and she believes “proper supervision is needed” from dedicated people in both accounting and technology.