Can business traders apply Section 475 elections to bitcoin trades?

May 21, 2014 | By: Robert A. Green, CPA

At the May 9 American Bar Association (ABA) meeting, tax attorneys asked the IRS about bitcoin. According to Tax Analysts coverage of the meeting, Jo Lynn Ricks of Deloitte Tax LLP said the IRS guidance didn’t answer the question of whether a virtual currency could be a commodity, adding that if it is a commodity, dealers and traders could elect mark-to-market treatment under section 475(e) and (f).

“If you have something that trades through a futures contract, then it could be a commodity through the [Commodity Exchange Act],” she said. Bitcoin futures are traded on an exchange called ICBIT, creating the potential for virtual currencies to meet that broader definition of commodity, according to Ricks.

In its guidance, the IRS labels bitcoin an “intangible asset,” but it doesn’t go as far as labeling bitcoin a commodity. The sale of an intangible asset, commodity or security brings capital gains or loss treatment. The sale of a commodity futures contract traded on a U.S. commodities or futures exchange means lower 60/40 tax rates under Section 1256.

Business traders electing Section 475 have ordinary gain or business loss treatment on Form 4797 Part II. We generally recommend business traders elect Section 475 on securities only, so they can retain lower 60/40 tax capital gains tax rates on futures (considered “commodities” in Section 475). Our tax attorney Mark Feldman suggests that to deal with bitcoins, the election language be changed so that it applies “for securities and for those commodities which are not eligible for Section 1256 treatment.”

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