Notice 2014-21 is Not a Ruling

If I could capture the misconceptions around the IRS publication last week in one phrase, it would be this opening to their commentary: “The IRS has ruled…”

The IRS did not rule on anything. The IRS does not create tax law or even regulations. So when they release notices, like the infamous Notice 2000-44 against Son of B.O.S.S. shelters, they are not creating rules. As in the case of Notice 2000-44, they emphatically restate the law as it already stands.

I can now disclose the tax advice I have given privately since January, which is that cryptocurrency investors and users should treat it as a capital asset for tax purposes. The IRS does not provide their reasoning directly, but it is implied, and it is the same as mine. We have a notion of intangible assets both inside and outside the tax law. If cryptocurrencies are intangible assets, then we apply Section 1221. Under Section 1221, all assets are capital assets, unless they are used in an active trade or business.

More importantly, the IRS did not have to publish Notice 2014-21 for this law to apply. Notices appear when it is apparent there will be rampant tax fraud, to make it easier for them to prosecute the tax fraud. The existence of the notice simplifies the legal case for prosecution of tax fraud.

The idea that the cryptocurrency community could have had a say in the content of Notice 2014-21 is ludicrous. The IRS didn’t even have a say in the content of the notice – they just had a say about whether or not they published it at all. The tax of currency was an exception to capital asset treatment created in 1986 under Section 988 and represents a punitive rather than beneficial provision. Lobbying and asking for MORE beneficial treatment than the best possible tax treatment available under the Internal Revenue Code? Get real!

Edit: I thought I might add an additional point: If this is not the law, and Notice 2014-21 is wrong, what is our recourse? Tax controversy follows different rules than most litigation. In this case, you would not want to refuse to pay and wait for the IRS to file a notice of deficiency against you. The reason is that the penalties would definitely apply, you don’t typically fight express positions this way. Instead, you pay the tax and then file for a refund in district court. Then, you can argue that Notice 2014-21 is a misstatement of the law.