In Notice 2014-21, the IRS announced its position that cryptocurrencies constitute property for tax purposes, rather than foreign currency, noting that while cryptocurrency may operate as "real" currency in some settings, "it is not legal tender in any jurisdiction". The adoption of Bitcoin as legal tender in El Salvador in 2021 rendered that statement incorrect and led some taxpayers to question whether Bitcoin could now qualify as currency for tax purposes. Notice 2023-34 answers that question in the negative and clarifies that the IRS considers cryptocurrency 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 mentioned above with a general observation that cryptocurrency "can serve one or more of the functions of 'real' currency: that is to say, the currency and paper money of the United States or of any other country designated as legal tender, circulates and is commonly used and accepted as a medium of exchange in the country of issue, but the use of virtual currency to carry out functions of the real currency are limitedโ. Notice 2023-34 does not otherwise change the conclusion in Notice 2014-21 that cryptocurrency cannot generate nontaxable foreign currency gains or losses for US federal income tax purposes.
While the IRS position remains clear that cryptocurrency is property, none of the Notices provide guidance on when, if ever, the IRS would treat cryptocurrency as foreign currency for tax purposes. The โlegal tenderโ requirement is probably necessary, but clearly not sufficient, presumably because cryptocurrency is not issued by a central bank. However, even if countries were to start issuing their own cryptocurrencies, there are no guarantees that the IRS won't continue to deny the currency's status on some other theory. To further complicate matters, Notice 2023-34 reaffirms previous IRS guidance that cryptocurrencies pegged to the US 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 final cryptocurrency regulations are enacted, it will likely remain uncertain when, if ever, cryptocurrency can be classified as currency for tax purposes.
