In an earlier post, we discussed the basics behind how Bitcoin operates and how it might create unique issues for employers. In the span of just a little over a month, the Bitcoin community has had its share of stories in the news cycle. One of the largest exchanges, Mt. Gox, has filed for bankruptcy following an apparent security breach costing customers and the exchange nearly $500 million. Within a couple weeks of Mt. Gox’s demise, Newsweek then claims to have identified the creator of the virtual currency, known only as Satoshi Nakamoto (the pseudonym used in the white paper that laid out the cryptography framework for bitcoin operations). Whether the person identified really is Nakamoto is still debated, but stories like this and the fall of Mt. Gox continue to add to the mystery that is bitcoin.

Yesterday, the IRS removed some of that mystery when it released guidance on the tax treatment of bitcoin and other virtual currencies (which just happened to be day one of a virtual currency industry summit in San Francisco). One of the appealing factors for users of the virtual currency is that it was an unregulated peer-to-peer network, meaning it is not tied to any central monetary authority. The IRS’s guidance was expected, but many in the Bitcoin community believed that it would be treated like any other foreign currency. Apparently relying on the premise that bitcoin does not have legal tender status in any jurisdiction, the IRS has determined that bitcoin should be treated as property for tax purposes.

IRS Notice 2014-21 is somewhat of a blow to bitcoin users because the exchange of property, even to buy a cup of coffee, is now a reportable event. The notice provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:

  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
  • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

This may sound like an insurmountable hurdle of onerous recordkeeping for virtual currencies, but automated accounting solutions are already in the works with more likely on the way. With a request for public comments included in its guidance, the IRS has signaled that these rules are not set in stone and changes may be ahead to the tax treatment of virtual currencies.

What seems unlikely to change is the continuing momentum bitcoin and other virtual currencies appear to be gaining. The failure of Mt. Gox may have been bad for Bitcoin’s public image, but supporters of the virtual currency seem undeterred. Despite security concerns, Bitcoin ATMs continue to pop up in the United States and abroad. The number of e-commerce retailers accepting bitcoin has outpaced those accepting in-store purchases, but that is starting to change. And even if your store of choice does not let you spend bitcoins, other companies have begun to find innovative ways around that problem too.

But perhaps the most intriguing item on the horizon is the race to open regulated investment funds and exchanges in the United States. Bitcoin might soon see an enormous influx of capital if investors are comfortable with the regulatory safeguards. The hope amongst the Bitcoin community is that this will lead to new innovations, making the use virtual currencies more prevalent and practical for everyday use.

New technologies almost always trend to the ‘more’ side of the spectrum. Whether Mr. Nakamoto’s (who(m)ever he or she is) vision of a global economy utilizing peer-to-peer transactions will come to pass is anyone’s guess, but you may not want to bet too much bitcoin against it.

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Photo of Joseph J. Lazzarotti Joseph J. Lazzarotti

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm’s Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP)…

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm’s Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP) with the International Association of Privacy Professionals. Trained as an employee benefits lawyer, focused on compliance, Joe also is a member of the firm’s Employee Benefits practice group.

In short, his practice focuses on the matrix of laws governing the privacy, security, and management of data, as well as the impact and regulation of social media. He also counsels companies on compliance, fiduciary, taxation, and administrative matters with respect to employee benefit plans.

Privacy and cybersecurity experience – Joe counsels multinational, national and regional companies in all industries on the broad array of laws, regulations, best practices, and preventive safeguards. The following are examples of areas of focus in his practice:

  • Advising health care providers, business associates, and group health plan sponsors concerning HIPAA/HITECH compliance, including risk assessments, policies and procedures, incident response plan development, vendor assessment and management programs, and training.
  • Coached hundreds of companies through the investigation, remediation, notification, and overall response to data breaches of all kinds – PHI, PII, payment card, etc.
  • Helping organizations address questions about the application, implementation, and overall compliance with European Union’s General Data Protection Regulation (GDPR) and, in particular, its implications in the U.S., together with preparing for the California Consumer Privacy Act.
  • Working with organizations to develop and implement video, audio, and data-driven monitoring and surveillance programs. For instance, in the transportation and related industries, Joe has worked with numerous clients on fleet management programs involving the use of telematics, dash-cams, event data recorders (EDR), and related technologies. He also has advised many clients in the use of biometrics including with regard to consent, data security, and retention issues under BIPA and other laws.
  • Assisting clients with growing state data security mandates to safeguard personal information, including steering clients through detailed risk assessments and converting those assessments into practical “best practice” risk management solutions, including written information security programs (WISPs). Related work includes compliance advice concerning FTC Act, Regulation S-P, GLBA, and New York Reg. 500.
  • Advising clients about best practices for electronic communications, including in social media, as well as when communicating under a “bring your own device” (BYOD) or “company owned personally enabled device” (COPE) environment.
  • Conducting various levels of privacy and data security training for executives and employees
  • Supports organizations through mergers, acquisitions, and reorganizations with regard to the handling of employee and customer data, and the safeguarding of that data during the transaction.
  • Representing organizations in matters involving inquiries into privacy and data security compliance before federal and state agencies including the HHS Office of Civil Rights, Federal Trade Commission, and various state Attorneys General.

Benefits counseling experience – Joe’s work in the benefits counseling area covers many areas of employee benefits law. Below are some examples of that work:

  • As part of the Firm’s Health Care Reform Team, he advises employers and plan sponsors regarding the establishment, administration and operation of fully insured and self-funded health and welfare plans to comply with ERISA, IRC, ACA/PPACA, HIPAA, COBRA, ADA, GINA, and other related laws.
  • Guiding clients through the selection of plan service providers, along with negotiating service agreements with vendors to address plan compliance and operations, while leveraging data security experience to ensure plan data is safeguarded.
  • Counsels plan sponsors on day-to-day compliance and administrative issues affecting plans.
  • Assists in the design and drafting of benefit plan documents, including severance and fringe benefit plans.
  • Advises plan sponsors concerning employee benefit plan operation, administration and correcting errors in operation.

Joe speaks and writes regularly on current employee benefits and data privacy and cybersecurity topics and his work has been published in leading business and legal journals and media outlets, such as The Washington Post, Inside Counsel, Bloomberg, The National Law Journal, Financial Times, Business Insurance, HR Magazine and NPR, as well as the ABA Journal, The American Lawyer, Law360, Bender’s Labor and Employment Bulletin, the Australian Privacy Law Bulletin and the Privacy, and Data Security Law Journal.

Joe served as a judicial law clerk for the Honorable Laura Denvir Stith on the Missouri Court of Appeals.