The ability of communities to effectively issue their own money is hampered by specific federal laws and regulations, the most significant of which relates to taxation. Currently the Internal Revenue Service treats all transactions in virtual currencies as though they are conducted in U.S. dollars. Further, it requires that taxpayers pay the IRS any tax due in dollars, rather than the virtual currency.

So, even if communities wanted to issue their own money to fund job creation programs and other expenditures, they would effectively be blocked from doing so because of a lack of dollars to pay any taxes resulting from those economic activities. Thus, even though we citizens can issue our own money legally, there are limits on how such money can be used effectively today.

A Possible Solution

What if the federal government were to accept alternative currencies for payment of fees and taxes. Such a prospect is more viable than one might imagine.

That’s because of action by the Internal Revenue Service Advisory Council¹ (IRSAC), a long-standing IRS advisory group created by Congress to analyze tax issues and make recommendations to the IRS. In 2018, the IRSAC was asked for suggestions on how to focus guidance to taxpayers on the use of virtual currencies (their term for complementary currencies).

In their year-end Public Report² the IRSAC noted that, “Use of virtual currency as a payment method has grown in popularity and has emerged as an alternative to using fiat currencies (i.e., government-issued currency).” The report went on to say that “Virtual currency poses tax compliance risks [arising] from non-willful conduct by a taxpayer (e.g., lack of understanding regarding the taxability of virtual currency transactions, how to calculate basis of gain/loss from virtual currency transactions, how to characterize income, third-party reporting responsibilities, etc.). Compliance risks can also arise from willful conduct by a taxpayer (e.g., using virtual currency to evade taxes).”

One of the key questions addressed by the IRSAC concerned the idea of the IRS accepting virtual currencies for payment of taxes. The IRSAC concluded that the IRS is already authorized to do so. Not only that, but the IRSAC recommended that the IRS should do so! Section 6311(a) provides that the IRS may receive “any commercially acceptable means [of payment of tax] that the Secretary deems appropriate to the extent and under the conditions provided in regulations prescribed by the Secretary.”

In that report, the IRSAC recommended that IRS: “Accept payment of tax liabilities with virtual currency. If the regulations under section 6311 were amended to provide for the payment of tax through virtual currency, the IRS could leverage the information and experience obtained from voluntary payments of virtual currency to strengthen enforced collections.”

This would solve a HUGE problem for anyone receiving a payment in a virtual currency that IRS would consider taxable, and as stated above, the IRS requires the taxpayer to pay the taxes due the IRS in dollars, not the virtual currency. So, if anyone were to pay employees, in whole or part in a complementary currency, the employer and the employee would have to pay any taxes due the IRS in dollars. Obviously very convenient for the IRS but VERY inconvenient for the taxpayers.

However, even though the IRS accepted and adopted a number of the recommendations in that report, they elected not to adopt this recommendation. When asked why by a senior U.S. Senator why not, the IRS replied:

“The position of the IRS is that virtual currency is property. See Notice 2014-21. Virtual currency does not have legal tender status in the United States and transactions with virtual currency are treated like transactions in any other property for tax purposes. There is no provision of federal law under which taxes may be paid by a voluntary transfer of real or personal property to the federal government…”

Note that they say “voluntary.” That does not mean that the IRS cannot accept property for payment of taxes. The Service has long seized property “involuntarily” from tax payers for payment of taxes, so systems are in place to handle receipt of property of all types.

This Could Create Massive Problems for the IRS

However, while the above solution would be very taxpayer friendly it would be less so for the IRS. There are currently thousands of alternative currencies in circulation today, many in the form of cryptocurrencies and many others that are not. In any case, accepting all manner of virtual currencies would likely be an unmanageable task for the IRS. Is there a easier solution? Yes, here it is.

A Better Solution

The remedy is relatively easy and either Congress or the president can implement it. In the case of Congress, a small rider attached to just about any bill would do it; for the president, a simple executive order is sufficient.

We are calling on Congress to enact a small piece of legislation that will dramatically enhance the ability of citizens to issue their own money without incurring any tax liability at all.  That solution is described here.