In Notice 2023-34[1], the IRS has modified Notice 2014-21. While the modification recognizes that some jurisdictions now treat Bitcoin as legal tender, it merely removes that statement from the background section but does not modify the Notice’s position that such currencies are treated as property and not foreign currency for US tax purposes.

The Notice provides:

The Department of the Treasury and the Internal Revenue Service are aware that certain foreign jurisdictions have enacted laws that characterize Bitcoin as legal tender. Thus, the sentence in the Background section of Notice 2014-21 stating that virtual currency does not have legal tender status in any jurisdiction is no longer accurate as to Bitcoin.[2]

The IRS also notes that the background to Notice 2014-21 indicated that virtual currencies may act as a substitute for real currency, a statement that the agency now views as potentially misleading:

In addition, the Background section of Notice 2014-21 may be misinterpreted as overstating the similarity between convertible virtual currency and “real” currency because the use of convertible virtual currency, including Bitcoin, to perform “real” currency functions is limited.[3]

Thus, the Notice provides the following modification to the third sentence in the first paragraph of the Background section of Notice 2014-21 to read as follows:

In certain contexts, virtual currency may serve one or more of the functions of “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but the use of virtual currency to perform “real” currency functions is limited.[4]

But Notice 2023-34 provides that the answers to the FAQs in Section 4 of Notice 2014-21 are not affected by these modifications to the Background discussion, in particular Q&A 2.[5] That Q&A reads:

Q-2: Is virtual currency treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under U.S. federal tax laws?

A-2: No. Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.[6]

[1] Notice 2023-34, April 24, 2023, https://www.taxnotes.com/research/federal/irs-guidance/notices/irs-updates-crypto-guidance-to-reflect-bitcoin-characterization/7gks6 (retrieved April 25, 2023)

[2] Notice 2023-34, April 24, 2023

[3] Notice 2023-34, April 24, 2023

[4] Notice 2023-34, April 24, 2023

[5] Notice 2023-34, April 24, 2023

[6] Notice 2014-21, March 25, 2014