The North Carolina state tax treatment of virtual currency: an unanswered question. (2024)

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I. INTRODUCTION

Imagine a situation where Mr. and Mrs. Smith of Newark, New Jerseysell their home and retire to Chapel Hill, North Carolina, where theyrent an apartment that they pay for with virtual currency. (1) Further,suppose that prior to moving, the Smiths had also converted the proceedsof their home sale into virtual currency. Theoretically, the Smithscould meet most of their daily needs by purchasing exclusively fromretailers who accept virtual currency. (2) Because the issue of virtualcurrency has not been addressed for North Carolina tax purposes, (3) theSmiths could conceivably live in North Carolina without paying statesales taxes if virtual currency were to become so prolific that all oftheir needs could be met by retailers who accept virtual currency.

In June 2016, the General Assembly of North Carolina updated thestate's Money Transmitter Statute. (4) This update explicitlystates that certain businesses who "maintain control of virtualcurrency on behalf of others" must comply with the requirements ofNorth Carolina's Money Transmitters Act. (5) In so doing, theGeneral Assembly recognized that virtual currency has monetary value.(6) Yet, North Carolina has not determined how it will address taxablepurchases made with virtual currency or whether gains and losses in thevalue of virtual currency would be considered a taxable event. (7)

This Note addresses the current state of the law regarding taxationof virtual currency and how North Carolina should address state salesand income tax issues. Part II provides background information onvirtual currency. (8) Part III explains how virtual currency is treatedfor federal tax purposes. (9) Part IV highlights how other states areaddressing the issue of state taxation. (10) Finally, Part V recommendshow virtual currency should be taxed in North Carolina. (11)

II. Background on Virtual Currency

A. What is Virtual Currency?

The Securities and Exchange Commission ("SEC") hasdefined virtual currency as a "digital representation of value thatcan be digitally traded and functions as a medium of exchange; a unit ofaccount; and/or a store of value, but does not have legal tenderstatus." (12) Its lack of legal tender status and the fact that itis not tied to a currency with legal tender status is whatdifferentiates virtual currency from real currency and e-money. (13)

Real currency, like the United States Dollar ("USD"), isissued by a sovereign power and is "designated as its legal tender;circulates; and is customarily used and accepted as a medium of exchangein the issuing country." (14) E-money is similar to virtualcurrency in that it is a method of "electronically transfer[ing]value." (15) However, e-money, unlike virtual currency, is merely a"digital representation" of real money--and thus its value isdetermined by a currency with legal tender status. (16) While Bitcoin isthe most popular type of virtual currency, there are many othervarieties of virtual currency. (17) Examples of other varieties ofvirtual currency include: Litecoin, PPCoin, (18) Ripple, (19) Dash, (20)and Guncoin. (21)

Convertible virtual currency is a subset of virtual currency, which"has an equivalent value in real currency, or that acts as asubstitute for real currency." (22) The Internal Revenue Service("IRS") has highlighted bitcoin as an example of convertiblevirtual currency. (23)

1. How Bitcoin Works

In contrast to the USD, Bitcoin is not regulated by a centralauthority. (24) Rather, it depends on individual bitcoin users known as"miners" (25) who both (1) confirm transactions and (2) infusemore bitcoins into the system. (26)

Miners authenticate transactions by using a software program tosolve algorithms, thus ensuring that other users have a sufficientbalance of bitcoins for the transaction in which they are seeking toengage. (27) Once a group of transactions called a "block" hasbeen authenticated, the "block" is added to the"blockchain." (28) The rate at which a block iscreated--roughly ten minutes per block--is managed by adjusting thecomplexity of the algorithm. (29) In order to prevent users fromspending the same bitcoin more than once, miners compare pendingtransactions to transactions that have already been added to theblockchain. (30)

One key feature of virtual currencies like Bitcoin is thattransactions have a high degree of anonymity. (31) Miners confirmtransactions without knowing the identity of the users. (32) Acombination of numbers called the public key "encrypts thebitcoin." (33) While, a different set of numbers, called theprivate key, "decrypts the bitcoin." (34)

The public keys are posted to the blockchain. (35) However, onlythe user who holds the private key can receive the bitcoin from thetransaction. (36) As compensation for verifying transactions, minersreceive newly created bitcoin and transaction fees. (37) This reward isthe only way in which new bitcoins are created. (38) Unlike with realcurrency, the amount of bitcoin that will ever be created has a setlimit, which is a draw for individuals concerned about inflation of realcurrencies. (39)

2. Other Types of Virtual Currency

Other popular virtual currencies work in a similar fashion asBitcoin. (40) For example, blocks of litecoin (the second most popularform of virtual currency) are added at a faster rate than bitcoinblocks. (41) Guncoin also creates blocks faster than bitcoin, averagingtwo minutes per block. (42) Because Guncoin has a faster mining rate,the maximum number of guncoins that can be created is 479 million morethan the maximum number of bitcoins. (43) Further, PPCoin differs fromBitcoin in that it does not limit the number of coins that will becreated. (44) Dash (formerly Darkcoin) provides greater anonymity thanBitcoin, because transactions are not displayed over the entire network,and transactions are processed more quickly. (45)

3. Acquiring Virtual Currency

Convertible virtual currency users may acquire coins throughexchanges, where users can both purchase virtual currency with realcurrency and trade virtual currency for real currency. (46)Alternatively, users can purchase virtual currency directly from otherusers in a face-to-face transaction. (47) In addition, ATMs allow usersto exchange virtual currency for real currency and vice versa when theyare on the go. (48) However, bitcoin ATMs are nowhere near as ubiquitousas cash ATMs. (49) Only 827 bitcoin ATMs exist worldwide while there are432,000 cash ATMs in the United States alone. (50)

B. Need for Regulation

Convertible virtual currencies like Bitcoin have numerous benefitsover traditional payment methods such as: "(1) lower costs andfees; (2) fewer risks for merchants; (3) increased anonymity for users;(4) speed and ease of transfer/payment; and (5) less susceptibility togovernment manipulation and inflationary pressure." (51) Because ofthese benefits, both online and brick and mortar retailers have startedaccepting virtual currency. (52) For example, a bakery owner in NorthCarolina, chose to accept bitcoin because of the lower transactioncosts. (53) Further, a bar owner in Wilmington, North Carolina, decidedto accept bitcoin because he viewed it as a good investment. (54) ReedsJewelers, a North Carolina company, also accepts bitcoin online and inits retail stores. (55) The director of Marketing and BusinessDevelopment at Reeds Jewelers, described the transactions involvingbitcoin as "impressive." (56)

The anonymity of convertible virtual currency transactions can alsomake them the preferred payment method for illegal operations. (57) Oneexample is Silk Road, which was an online marketplace for illicit drugsand other illegal items before the government shut it down. (58) Inanother case, hackers prevented a Los Angeles hospital from accessingonline patient medical records until the hospital paid a ransom of$17,000 worth of bitcoin. (59) Additionally, some websites that are tiedto terrorist organization solicit bitcoin donations. (60) As such, ISIShas received at least the equivalent of S3 million in bitcoin since2012. (61) While the ties to terrorism have been heavily reported upon,other methods of financing such as kidnapping and oil sales have beenused to a greater degree. (62)

1. Federal Regulation

Because the anonymous nature of virtual currency makes itsusceptible to nefarious activity, the Federal Government has started toregulate virtual currency transactions. (63) This has been done largelyunder the existing anti-money laundering framework, which regulatesmoney services businesses ("MSB") which includes moneytransmitters. (64)

The Financial Crimes Enforcement Network ("FinCEN"),which was established under the Bank Secrecy Act ("BSA"), isthe "primary regulator of money transmitters for criminal activitymonitoring purposes." (65) As such, money transmitters mustregister with, and be regulated by, FinCEN. (66) In the past, businessesinvolved in the transmission of virtual currency were unsure whetherthey were required to register as a money transmitter because virtualcurrency is not technically a currency. (67)

Consequently, FinCEN issued guidance in 2013 where it stated thatalthough virtual currency was not a currency, "administrators"and "exchangers" of virtual currency would be considered moneytransmitters subject to registration and oversight. (68) Anadministrator is defined as "a person engaged as a business inissuing a virtual currency, and who has the authority to redeem suchvirtual currency. (69) Additionally, an exchanger is "a personengaged as a business in the exchange of virtual currency for realcurrency, funds, or other virtual currency." (70)

This clarification initially created uncertainty for miners dealingin virtual currencies because miners were not explicitly mentioned inthe guidance. (71) Thus, FinCEN issued an administrative ruling statingthat miners who mined virtual currency solely for their own benefitwould not be subject to registration requirements. (72) The rulinghighlighted that the amended BSA broadly defined money transmitterservices as accepting "currency, funds, or other value thatsubstitutes for currency from one person" and transmitting the"currency, funds, or other value that substitutes for currency toanother location or person by any means." (73) Further, the rulingemphasized that whether an activity is considered to be a moneytransmitter under the broad definition is "a matter of facts andcirc*mstances." (74) Experts in blockchain technology law haveargued that the facts and circ*mstances test, used to determine whetheran individual is engaging in money transmission, is "veryfuzzy." (75) For example, in the ruling, FinCEN stated that a minerwho makes a purchase by paying bitcoin to a party that is not the sellerhimself or herself, at the seller's direction, may be a moneytransmitter. (76) However, FinCEN did not elaborate as to what would tipthe balance in the hypothetical situation. (77)

2. State Regulation

State regulation of money transmitters is important, regardless ofwhether the federal government regulates virtual currency under federalmoney transmitter laws, because state laws have a different objective.(78) Generally, state money transmitter laws focus on consumerprotection to a greater degree than federal statutes. (79) State lawsand federal law are interconnected in that federal law requires moneytransmitters to be licensed at the state level. (80)

Many states define money transmitters broadly. (81) However, manystates also "provide exemptions for various entities," whichtypically include entities that are already subject to regulation suchas banks and departments or agencies within the federal or stategovernment. (82) Entities covered by the definition of moneytransmitters in state money transmission statutes, which do not fallwithin an exception, must secure a license with the state's bankingauthority. (83) As with federal regulations, there has been confusionregarding whether state money transmitter staUites apply to virtualcurrency entities. (84)

Florida was the first state to criminally charge bitcoin exchangersunder state money transmitter statutes for operating an unlicensed moneytransmitter business. (85) The Florida judge gained national attention(86) when she dismissed charges against a man on the grounds thatbitcoin is not money. (87) The case was appealed to Florida's ThirdDistrict Court of Appeals. (88)

In an effort to eliminate vagueness, some states have issuedguidance or updated their money transmitter statutes to clarify howtheir statutes treat virtual currency. (89) New York elected not toregulate virtual currencies within its existing money transmitterstatute. (90) Rather, New York created a separate licensing regime forvirtual currencies that has requirements "similar to those imposedby money transmitter regulation" (91) and additional requirementsthat are tailored to virtual currency transmitters in particular, suchas special suspicious activity reports ("SARs") (92) and cybersecurity programs. (93)

North Carolina opted to amend its Money Transmitter Act to clarifyits application to virtual currency. (94) The amendment specifies thatengaging in the business of "receiving money or monetary value fortransmission or holding funds incidental to transmission" that is"primarily for personal, family, or household purposes" isconsidered to be money transmission. (95) Further, the amendmentexplicitly states that "maintaining control of virtual currency onbehalf of others" falls within the definition provided that it is"primarily for personal, family, or household purposes." (96)Businesses that conduct the activities specified must acquire a licensefrom the state. (97) Knowingly or willingly failing to comply withlicensing requirements and regulation may result in criminal penalties.(98) Noncompliance could also result in civil monetary penalties. (99)

Designation as a money transmitter also requires businesses tocomply with certain consumer protection mechanisms. (100) For example,money transmitters must post surety bonds or deposits to ensure they canfulfill the transmission. (101) Further, they must provide documentationof their "internal business controls, including controls specificto information technology and data integrity." (102)

III. FEDERAL TAX TREATMENT

Although the SEC treats virtual currency as if it were money underthe securities laws, (103) and FinCEN requires exchangers of virtualcurrency to register as money transmitters, (104) the IRS decidedagainst treating virtual currency as if it were currency under the taxlaws. (105) In April 2014, the IRS issued a notice ("Notice")that stated, for federal tax purposes, convertible virtual currencywould be treated as property and as such, general tax principlesregarding income received in the form of property would apply. (106)Further, tax principles regarding adjustments to taxable income based ongains or losses in the fair market value of property also apply. (107)

A. Requirements

The IRS Notice requires taxpayers to determine the value of virtualcurrency received as payment for goods and services in terms of USD atthe time of the payment. (108) Taxpayers are required to determine thevalue of virtual currency in a "reasonable manner that isconsistently applied." (109) The Notice makes clear that the valueof the virtual currency cannot be assumed to be the amount that ataxpayer would accept in USD for the same or similar good or service.(110) Rather, a retailer or service provider has to determine the valueof virtual currency in USD for each different type of virtual currencythat he or she accepts." (111)

For virtual currencies that are traded on exchanges, taxpayers cancalculate the fair market value in terms of USD by looking at the valueof the virtual currency on a particular exchange for that day. (112)Given that the exchange price for bitcoin has varied by as much as 20%among different exchanges, the taxpayer must consistently use the samemethod in order to prevent the underestimation of tax liability. (113)However, for virtual currencies that have yet to trade on exchanges, itis unclear how a taxpayer should calculate the fair market value interms of USD. (114) This confusion is further exacerbated by the factthat both the buyer and seller must calculate the fair market value ofthe virtual currency in order to report it on their respective incometax returns. (115)

A taxpayer who purchases goods or services must determine (1) thefair market value of the virtual currency at the time he or she acquiredit and compare it to (2) its fair market value at the time of thepurchase of goods or services with the virtual currency. (116) This isnecessary because the taxpayer must report if he or she experiences again or loss in the fair market value of the virtual currency as eithera gain or loss in income. (117) The tax treatment of the gain or loss tothe taxpayer will differ depending on if the virtual currency is acapital asset. (118) If a taxpayer acquires and spends virtual currencywithin the course of a year, it is classified as a "short-termtransaction" and is subject to ordinary income tax rates. (119) Onthe other hand, if a taxpayer holds virtual currency for over a year, itis considered a "long-term transaction" and is taxed at thecapital gains rate. (120)

The virtual currency that miners receive for validating virtualcurrency transactions is subject to income taxes. (121) Miners mustrecord the fair market value of the virtual currency at the time it isreceived, and track the changes in value once it is exchanged for realcurrency or used to make a purchase. (122)

Just as retailers who accept virtual currency are required todetermine the value of the virtual currency in USD at the time ofreceipt, employers who pay in virtual currency are required to determinethe value of the virtual currency in USD when they pay employees. (123)After doing so, employers must use the USD amount as the basis fordetermining federal income tax withholding on the virtual currencywages. (124)

B. Implications

The decision to treat virtual currency as property and thus requirereporting of gains or losses with every transaction, threatens to make"compliance with tax laws unnecessarily cumbersome." (125)Because some types of virtual currency, like Bitcoin, are used primarilyas a "means of payment for virtual and real goods," treatingvirtual currency as if it were property undermines its utility. (126)The property classification does not make an exception for small gains.(127) Thus, in order to comply with the letter of law, a gain of tencents would have to be reported as a gain in income. (128)

Because of the anonymous nature of virtual currency, complying withfederal income tax laws for the majority of users would essentially beleft up to patriotic duty. (129) The fact that the IRS cannot get theinformation it needs to enforce violations of reporting requirements ofconsumer purchases, because virtual wallets are not tied to individuals,disincentives taxpayers from complying with the tax law. (130)

Professor Omri Marian, a scholar in the area of tax havens, (131)suggested that virtual currencies like Bitcoin could surpass the use oftraditional tax haven offshore accounts because they have the advantageof eliminating intermediaries. (132) Thus, "traditionalanti-tax-evasion mechanisms cannot successfully address Bitcoin-basedtax evasion." (133)

In recognition of the enforcement problem, the IRS has charged agroup of agents with "mastering] Bitcoin and other virtualcurrencies." (134) These agents will attempt to find tax evaders byreviewing all of the transactions on the blockchain and then workingbackwards to determine the public address of the participant in thetransaction. (135) From there, the IRS will attempt to match anindividual name with a public address. (136) Given the fact that thetrue identity of the founder of Bitcoin has yet to be discovered, itseems unlikely that attempting to match blockchain transactions toindividual people could actually uncover tax evaders. (137)

In addition, the federal tax treatment can discourage employersthat wish to pay their employees in virtual currency from doing so.(138) Under the federal tax laws, an employer who pays an employee invirtual currency could also be considered to have received taxableincome on payday. (139) An employer would be required to keep track ofthe price that was paid for the virtual currency and its fair marketvalue on the day the employees are paid. (140) Thus, an employer wouldhave a taxable gain if the fair market value on payday is higher thanthe amount that the employer paid for the virtual currency. (141) Forexample, if the employer paid $1,000 for bitcoin on Monday and then paidthe employees the bitcoin on Friday, when the value was $1,500 theemployer would have a taxable gain of $500. (142) Further, thefluctuations in the USD value of bitcoin would significantly affect anemployer's obligations to the IRS with respect to income taxwithholdings and payroll taxes, because the USD value of a set amount ofbitcoin would fluctuate from pay period to pay period. (143)

IV. STATE TAX TREATMENT

Following the lead of the IRS, some states have considered thesales tax and income tax consequences of virtual currency transactions.(144) Two approaches have been promulgated with regard to sales tax: (1)the barter approach ("Barter Approach") and (2) the advertisedprice approach ("Advertised Price Approach"). (145) As forincome tax, the property tax treatment implemented by the IRS has beenthe only method implemented at the state level. (146)

A. Sales Tax

1. Barter Approach

Kentucky, New Jersey, New York, and Wisconsin have opted to followthe federal tax regime and treat virtual currency as property. (147)Thus, transactions involving bitcoin are treated like bartertransactions, where goods or services are traded for other goods orservices. (148) Under this system, a sales tax applies when convertiblevirtual currency serves as consideration for tangible property or aservice, which would ordinarily be subject to a sales tax. (149)

The amount of sales tax due is determined by converting the virtualcurrency into its USD equivalent value at the time of the purchase, andcalculating the sales tax based on the USD amount. (150) In a bartertransaction for which taxable goods or services are exchanged for othertaxable goods or services, sales tax is calculated based on the value ofboth sides of the transaction. (151) However, virtual currency istreated as intangible property, which is not subject to sales tax. (152)Thus, barter transactions with virtual currency are not taxed on bothends. (153) Rather, only the value of the taxable good or service wouldbe taxed. (154) Similarly, using real currency to purchase virtualcurrency would not result in sales tax liability given its status asintangible property. (155)

As with the federal system, the value of the taxable goods orservices under the state barter approach is considered to be the fairmarket value of the virtual currency, which was given as consideration.(156) In accordance with the federal tax treatment, the fair marketvalue of the virtual currency is determined at the time of the purchase.(157) Retailers, therefore, must keep detailed records of the fairmarket value of virtual currency, in terms of USD, which they accept inexchange for taxable goods or services. (158)

2. Advertised Price

California and Washington have also issued guidance regarding thestate tax treatment of virtual currency, but neither state explicitlyindicated whether virtual currency would be treated as a currency or asproperty. (159) However, the method of determining the basis to be taxedsuggests that both states view virtual currencies as currency becausethey are treated as traditional forms of payment like credit cards andchecks. (160)

When a consumer purchases taxable goods or services with a virtualcurrency, the basis for sales tax purposes will be determined by theamount (in USD) that the retailer would have received had the customerused a traditional form of payment. (161) Generally speaking, the priceof goods and services are not negotiated, so the basis for sales taxpurposes will be the advertised price of the goods or services. (162)Retailers must keep records detailing the prices (in USD) that theyusually charge for an item or similar items. (163)

B. Corporate and Personal Income Tax

Although few states have determined how to treat virtual currencyfor income tax purposes, both New Jersey and New York have addressed theissue. (164) As with sales taxes in these respective states, virtualcurrency is treated as property, in accordance with the Notice. (165)Consequently, both states follow the federal guideline for taxing gainsand deducting losses, requiring virtual currency users to keep track ofthe fair market value of the virtual currency at the time of acquisitionand use. (166)

With respect to wages that are paid in the form of virtualcurrency, New Jersey's guidance states that virtual currency mustbe converted into USD, after which it will be subject to New Jerseyincome tax withholding requirements. (167) However, given theimplications of the federal tax treatment, whereby employers could besubject to a taxable gain on payday, there is a disincentive foremployers to pay in virtual currency. (168)

V. RECOMMENDATIONS FOR NORTH CAROLINA

Given North Carolina's efforts to provide certainty regardingthe applicability of North Carolina's Money Transmitters Act. itlogically follows that the General Assembly should address the state taxtreatment of virtual currencies.

A. Sales Tax

North Carolina should adopt the Advertised Price method because:(1) the federal treatment is fundamentally at odds with recent effortsto simplify the tax code in North Carolina; (169) (2) North Carolinashould not conform the sales tax treatment of virtual currency to thefederal definition of virtual currency to create uniformity, because thefederal treatment could change; (170) (3) the Advertised Price Approachis a more accurate determination of the value of the item bought withvirtual currency; (171) and (4) the Barter Approach will encourageretailers to only accept bitcoin. (172)

1. The Barter Approach Would Be Fundamentally at Odds with NorthCarolina's Efforts to Simplify the Tax Code.

Starting in 2013, the North Carolina General Assembly began togradually simplify and reform the tax code by (1) opting for a flat taxon income to replace its three-tiered tax bracket approach and (2)repealing the estate tax. (173)

The General Assembly also attempted to simplify North Carolinasales taxes by making sales tax provisions more uniform. (174) Forexample, the sale of modular homes and admission tickets toentertainment activities are now taxed at the regular sales tax. (175)

Under the Barter Approach, retailers would be required to calculatethe USD equivalence of virtual currency, which could greatly varydepending on the day and the type of virtual currency. (176) Thus, thisapproach would contradict North Carolina's effort to make thecollection of sales tax more uniform. (177) While the rates at which theUSD amount would be taxed would not be effected, determining the fairmarket value of each virtual currency, every day that it is accepted aspayment, would make determining the basis to apply to the rateburdensome. (178)

For most retailers, the Advertised Price Approach would onlyrequire the sales price in terms of USD, which the vast majority ofretailers already possess. (179) A flaw in the Advertised Price Approachis that it is ill-suited for businesses that do not have an advertisedprice that is generally accepted in exchange for the good or service,such as automobile sales. (180)

A hybrid system, where retailers who accept prices that are outsideof a specified variation of the advertised price would be required tofollow the Barter Approach, would allow retailers to choose the optionthat best suits their needs. For example, retailers could (1) adjusttheir advertised price to be more in line with the price they arewilling to accept or (2) calculate the tax basis by determining the fairmarket value of virtual currency. (181) Practically speaking, theAdvertised Price Approach would address most of the items bought on adaily basis. (182)

In terms of deciding how much virtual currency should be chargedfor an item, the Advertised Price Approach would allow retailers thefreedom to decide for themselves how often they wish to consult exchangerates. (183)

In setting prices for virtual currency, some retailers willdetermine the price they will charge by using the "current marketrate" at the time of the price quote. (184) Retailers may decide toconsult the average fair market value on multiple exchanges or rely on asingle exchange. (185) Given the volatility in the fair market value ofvirtual currency, it is reasonable to assume that merchants would wantto consult virtual currency exchanges daily, before setting the price,in terms of virtual currency. (186) However, not all retailers may deemit necessary to consult the exchanges this frequently. (187) Forexample, Tom Barber of Wilmington, North Carolina, decided to acceptbitcoin because he sees it as a good investment, thus he may not be asconcerned with the variation of bitcoin on a day-to-day basis. (188)Yet, under the Barter Approach he would be required to consult virtualcurrency exchanges each day he accepted virtual anyway. (189)

It could be argued that the Barter Approach is not burdensomebecause it only requires information which retailers would already beobligated to collect, regarding the daily fair market value of virtualcurrency, under federal income tax requirements. (190) However, NorthCarolina should not implement an unduly burdensome approach in relianceon the federal treatment because it is possible that the federaltreatment could change due to the pressure of public opinion. (191) Someindividuals are pushing for such a change by seeking to legislativelyoverride the IRS's determination. (192) For example, a House Bill,which did not come out of committee, was introduced to change thefederal tax treatment of virtual currency so that it would be treated ascurrency instead of property. (193) In addition to treating virtualcurrency as foreign currency, the bill would have taxed virtual currencyonly after the virtual currency was exchanged for USD or a foreigncurrency. (194)

Further, the American Institute of Certified Public Accountants("AICPA") sent a letter to the IRS in which it highlighted"major issues" with the IRS Notice. (195) The group soughtclarification on (1) valuing "alternative currencies," (2)calculating gains and losses, (3) and classifying gains and losses"among many types of property." (196) Additionally, the letterrequested a de minimis exclusion similar to foreign currencytransactions where small gains would not be required to be reported.(197) While the IRS confirmed that there were no plans to update theNotice, it did not respond to the request for clarification. (198) Thisfailure to respond to the largest accounting trade association in theworld may be due to the fact that the IRS does not have the answers onhow to clarify the Notice. (199) Regardless of the reasons why the IRSdid not respond to the request for clarification, the notoriety of theAICPA may lead others to seek clarification or a change in theguidelines. (200)

While Singapore also follows the property classification, (201) theEuropean Union, (202) Russia, (203) and Japan (204) have opted to treatvirtual currency as currency for tax purposes. Given that this trendoccurred after the Notice was issued, it could influence the IRS torethink its position. (205) Australia, on the other hand, took anapproach that is a hybrid of the property treatment of the United Statesand the currency treatment of other countries stating that,"Bitcoin is neither money nor a foreign currency, and the supply ofbitcoin is not a financial supply for goods and services tax (GST)purposes." (206) However, Australia does treat bitcoin as propertyfor purposes of capital gains taxes on businesses. (207)

2. The Advertised Price Approach Would Be a More Accurate Methodfor Determining the Value of a Good or Service

Given the inherent value volatility in virtual currency, the basisfor the sales tax under the Barter Approach could vary substantially.(208) Retailers could consult exchange rates to convert the price in USDto a price in virtual currency, based on its value in terms of USD onthe day of the transaction, so that the tax basis would stay constantfrom day to day. (209) However, as previously mentioned, it is not clearthat all businesses would be inclined to do so, nor is it clear that itwould be practical. (210)

Under the federal system, on which the Barter Approach relies,(211) the fair market value must be calculated as of the day of thetransaction, in a manner that is consistent. (212) Thus, a businesswhere customers make purchases in and around the midnight hour, such asa bar, would technically have to tax a beer sold at 11:59:59 P.M.differently from a beer sold at 12:00:00 A.M. (213) The beer sold at11:59:59 P.M. would be taxed based on the fair market value of virtualcurrency in terms of USD for Day A, while the beer sold at 12:00:00 A.M.would be taxed based on the fair market value for Day B. (214) On theother hand, if the Advertised Price Approach was applied, the same beerssold a second apart would result in equal tax liabilities. (215)Therefore, relying on the advertised price in terms of USD would be amore accurate picture of the true value of the item being bought. (216)

3. The Barter Approach Would Encourage Businesses to Only AcceptBitcoin

Requiring retailers to comply with the Barter Approach, anddetermine the daily fair market value of every virtual currencyaccepted, would unfairly disadvantage virtual currency providers otherthan Bitcoin. (217) As previously discussed with regard to Bitcoin,retailers who accept virtual currency may wish to determine the fairmarket value of virtual currency before setting a price in terms ofvirtual currency, but they may not wish to do so on a daily basis. (218)Because Bitcoin is the most popular virtual currency, (219) retailerswould have an incentive to only accept bitcoin in order to avoid thehassle of converting other virtual currencies into USD. (220) Under theAdvertised Price Approach, retailers would not need to keep separaterecords of the daily fair market value of every virtual currency thatthey accept, (221) and thus would not be burdened if they decided toaccept less popular virtual currencies, (222) particularly ones that arenot traded on an exchange. (223) Some companies have opted to usethird-party processors, whereby the processor accepts bitcoin convertsbitcoin to USD, and sends the retailer USD the next day. (224) Thisallows the retailer to avoid the hassle of calculating the tax liabilityof receiving bitcoin because the retailer never possesses bitcoin. (225)Aside from indirectly increasing costs for businesses by incentivizingthe use of payment processors, (226) this preference to avoidcomplicating their tax liability can prevent other forms of virtualcurrency from gaining popularity. (227)

B. Income Tax

For the same reasons why it would be ill-advised to follow thefederal tax classification for sales tax purposes (complications indetermining the taxable basis), it would also be difficult to treatvirtual currency as income for North Carolina income taxes. (228)Further, enforcement against tax evasion would not be practical at thestate level given that even the IRS is unsure about how to track downvirtual currency tax evaders. (229) Given this obstacle to enforcement,the likelihood that one would be audited even at the federal level isvery low. (230) In fact, legal specialists in the field of virtualcurrency have yet to come across bitcoin related audits. (231)

New Jersey and New York are the only states that have addressed theapplicability of state income taxes to virtual currency. (232) However,failing to address income taxes could result in a loss of tax revenuefrom retailers who receive payment in virtual currency and employees whoare paid in virtual currency. (233)

1. Alternatives for State Income Tax Treatment

A. FOREIGN CURRENCY

As highlighted in the House Bill proposing to change the taxclassification of virtual currency, virtual currency tends to be used toengage in everyday transactions. (234) This characteristic makes virtualcurrency transactions more analogous to foreign currency transactionsthan barter transactions. (235) Thus, for state income tax purposes, itwould make sense to apply features of the federal tax treatment offoreign currency to virtual currency transactions. (236)

One such feature is the de minimis exception for foreign currencytransactions, which allows individuals to realize up to $ (200) in gainsbefore reporting. (237) This feature would address one of the concernsthat the AICPA highlighted in its letter to the IRS--that very smallgains would be too burdensome to report. (238) While it is unclear ifthe result would occur, enacting a de minimis exception could have theadded benefit of encouraging individuals to comply with reporting forlarger gains because compliance would not seem so burdensome. (239)

Foreign currency treatment would also simplify the reportingprocess for businesses. (240) Businesses who regularly transact usingvirtual currency could seek to be classified as a Qualified BusinessUnit ("QBU"), which would ease their reporting requirements.(241) In order to become a QBU, a business would have to have a separateunit with its own books and records. (242) Further, the QBU must bedeemed to have a functional currency that is a foreign currency. (243)If these requirements are met, the QBU can qualify for a reportingsystem that does not mandate determining gains and losses on everyvirtual currency transaction. (244) Rather, the QBU would only berequired to:

 (1) compute the taxable income or loss of the branch separately in its functional currency; (2) translate the income or loss from the functional currency to U.S. dollars using the weighted average exchange rate for the taxable year; and (3) make proper adjustments for transfers of property between QBUs having different functional currencies. (245)

While the IRS has not deemed virtual currency to be currency, (246)the North Carolina Department of Revenue has not issued a similarstatement. (247) The amendment to the North Carolina Money TransmitterStatute further signals the State's willingness to treat virtualcurrency as currency. (248) In addition to easing reportingrequirements, treating virtual currencies in this manner would eliminatethe need to differentiate between ordinary gains or losses and capitalgains or losses because any gains or losses from transferring thefunctional currency into USD would be treated as ordinary income. (249)

The historical background of foreign currency treatment also lendscredence to the argument that a unit of value that is treated ascurrency should be taxed as currency. (250) Before (1986), foreigncurrency was treated as property for tax purposes. (251) Because it wasbeing used as a currency, however, the tax treatment resulted in"inconsistent judicial decisions." (252) Further, taxpayersand auditors alike have had difficulty complying with and overseeing thecumbersome reporting requirements. (253) Thus, Subpart J was added tothe tax code to address the inefficiencies resulting in treating a unitof exchange that functions like currency under a property classificationwithout any adjustments. (254)

B. REPEAL THE INCOME TAX AND RAISE THE SALES TAX

Alternatively, North Carolina could choose to address shortfallsfrom virtual currency income, not falling under the current state incometax system, by eliminating the personal income tax in favor of a salestax increase. (255) Such a shift would compensate for virtual currencyuse by taxing consumption, which could be enforced without relying onthe honesty of taxpayers (256) or on special agents skilled in tracingvirtual currency transactions. (257) This option would be viable forNorth Carolina's needs because: (1) the General Assembly has beengradually focusing on increasing revenues through taxes on goods andservices while decreasing income tax rates (258) and (2) theprogressivity of the income tax, which is one of the principal reasonsfor relying on an income tax, is not as pertinent to North Carolina.(259) Further, as a tourist destination, (260) North Carolina could alsocapitalize on sales tax revenues gained from tourist spending, asFlorida has done. (261) While increasing sales taxes poses a risk thattourists will go elsewhere, people (other than large groups such as oneshosting conventions) are not always deterred by higher taxes. (262)

Over the past few years, North Carolina has decreased its relianceon the personal and corporate income tax, lowering the rate for thehighest bracket for individuals from 7.75% to a flat tax rate of 5.75%,which will decrease to 5.499% in 20 1 7. (263) The corporate income taxrate has also been reduced from 6% in 2014, (264) to 4% in 20 1 6. (265)Beginning in 2017, the corporate income tax rate will also be lowered to3%. (266) On the other hand, while the general rate of sales tax has notincreased, exemptions have been reduced and items which were previouslytaxed at preferential rates are now taxed at the general rate. (267) Forexample, the sales tax holiday (268) and the exemption for "mealssold at higher educational facilities, such as college cafeterias"were eliminated. (269) Further, sales taxes (at the general rate) wereapplied to services which had not previously been taxed before, such asautomobile repair services. (270) Thus, based on past tax bills, theGeneral Assembly is amenable to focusing more heavily on sales taxes.(271) Lieutenant Governor Dan Forest has said that the "ultimategoar is to abolish the income tax. (272)

A principal reason for having an income tax, rather than solelyrelying on sales taxes, is that income taxes are progressive when ratesare broken into tax brackets. (273) For example, if the federalgovernment or states that follow the federal government, in havingprogressive tax brackets, abolished income taxes in favor of salestaxes, the tax rate would shift from being based on one's income tothe same rate for everyone. (274) However, the North Carolina income taxis based on a flat rate, which applies at the same rate regardless ofincome. (275) Thus, if North Carolina were to abolish the flat incometax in favor of a sales tax, the predominant tax would still apply atthe same rate to every individual. (276)

Sales taxes are generally classified as regressive because the"poor, on average, spend a higher percentage of their income onconsumer goods" and thus, sales taxes disproportionately affect thepoor. (277) Yet, some sales taxes are more regressive than others. (278)If goods essential to basic needs were exempt from sales tax, the taxwould be less regressive. (279) In North Carolina, prescriptions areexempt from sales tax and only local sales taxes are applied togroceries, which lessens the impact on lower income individuals. (280)North Carolina could consider lowering the tax on electricity andfurther increasing the sales tax on entertainment admission tickets inorder to combat the hardships to lower income individuals. (281)

Another downside to solely relying on a sales tax is that it wouldnegatively impact local retailers in the short term by encouragingsavings. (282) Replacing the income tax with a sales tax wouldincentivize taxpayers to save more because they would only be taxed ontheir consumption. (28). Yet, with current interest rates being as lowas they are, (284) people are incentivized to spend. (285)

A concern with raising state sales taxes is that residents willtravel to bordering states to make purchases to avoid sales taxes. (286)The ranking from the highest possible combined state and local taxesamong bordering states to the lowest is as follows: Tennessee, (287)South Carolina, (288) Georgia, (289) North Carolina, (290) and Virginia.(291) South Carolina has the second highest state sales tax, althoughthe lowest tax combined rate is. (75) less than the lowest combined ratein North Carolina. (292) North Carolina could lower the maximumpermissible local sales tax rate, similar to the (1) % local rate inVirginia and, in order to increase the state sales tax without having adrastic effect on the combined rate. (293) Local governments couldrecoup lost revenue by increasing local property taxes. (294) Thisapproach would lower the likelihood that residents will leave the stateto make purchases and lessen the burden on lower income individuals.(295)

Raising the sales tax could cause customers to turn to onlineretailers instead of brick and mortar stores, but online retailers havebeen challenged to collect sales taxes. (296) For example, Amazoncharges sales tax on items shipped to a majority of states, includingNorth Carolina. (297)

VI. CONCLUSION

North Carolina's updated Money Transmission Statute treatsvirtual currency as having monetary value for purposes of the Statute.(298) However, the State's tax code does not reflect thisdevelopment. (299) Therefore, the state tax code needs to be updated sothat individuals cannot use the current uncertainty surrounding virtualcurrency as a means of avoiding state taxes.

While the majority of states that have issued guidance havefollowed the Notice's approach and treat virtual currency asproperty under sales tax laws, (300) North Carolina should not take thatapproach. Instead, North Carolina should follow the Advertised PriceApproach used by California and Washington because: (1) the federaltreatment is fundamentally at odds with the recent efforts to simplifythe tax code in North Carolina, (301) (2) the Advertised Price Approachwould be a more accurate picture of the value of the item bought withvirtual currency, (302) and ((3)) the Barter Approach would discourageinnovation, because retailers would be incentivized to only accept thevirtual currency with the greatest market share, which is currentlyBitcoin. (303) It is notable that the Advertised Price Approach is usedby states that are either home to or neighbors with Silicon Valley,(304) which suggests that the Advertised Price Approach is more attunedto the needs of the technology industry. (305) Given NorthCarolina's emphasis on technology in Research Triangle Park, it isreasonable for North Carolina to model its sales tax treatment afterCalifornia. (306)

In addition, North Carolina should address the treatment of virtualcurrency for income tax purposes. Because of the de minimis exception(307) and simpler tax treatment for QBUs, (308) treating virtualcurrency the same as foreign currency for income tax purposes, ratherthan treating it as property per the Notice, makes sense in NorthCarolina. (309) Alternatively, repealing the state income tax andraising the state sales tax (with a possible increase in property taxes)would allow the state to prevent retailers and employees who are paid invirtual currency from decreasing their state income tax liability.

(103.) SEC v. Trendon T. Shavers and Bitcoin Savings and Trust, SEcl*tigation Release No. 23090 (Sept. 22, 2014),https://www.sec.gov/litigation/litreleases/2014/lr23090.htm.

(104.) FIN-2013-G001, supra note 67.

(105.) See I.R.S. Notice, supra note 22 (treating virtual currencyas property); see generally In re Coinflip, Inc., CFTC No. 15-29 (Sept.17, 2015) (finding that Bitcoin was a commodity).

(106.) I.R.S. Notice, supra note 22; Treas. Inspector Gen. for Taxadmin., 2016-30083, As the Use of Virtual Currencies in TaxableTransactions Becomes More Common, Additional Actions are Needed toEnsure Taxpayer Compliance 2 (Sept. 21, 2016) [hereinafter Treas.Inspector Gen. Report].

(107.) I.R.S. Notice, supra note 22.

(108.) I.R.S. Notice, supra note 22.

(109.) I.R.S. Notice, supra note 22.

(110.) I.R.S. Notice, supra note 22.

(111.) See I.R.S. Notice, supra note 22 ("A taxpayer whor*ceives virtual currency as payment for goods or services must, incomputing gross income, include the fair market value of the virtualcurrency, meas ured in U.S. dollars, as of the date that the virtualcurrency was received.").

(112.) I.R.S. Notice, supra note 22 ("If a virtual currency islisted on an exchange and the exchange rate is established by markedsupply and demand the fair market value of the virtual currency isdetermined by converting the virtual currency into U.S. dollars (or intoanother real currency which in turn can be converted in U.S. dollars) atthe exchange rate, in a reasonable manner that is consistently applied);Ryan Selkis, Bitcoin Tax Guide: Trading Gains and Losses - Fair MarketValue, Investopedia, http://www.investopedia.com/university/definitive-bitcoin-tax-guide-dont-let-irs-snow-you/definitive-bitcoin-tax-guidechapter-2-trading-gains-and-losses-fair-market-value.asp (last visited Sept. 12, 2016).

(113.) See Selkis, supra note 110 (stating that bitcoin'svalue has varied "as much as [20%] between differentexchanges"); Comment Letter from Am. Inst, of Certified PublicAccountants, to I.R.S. (June 10, 2016) [hereinafter AICPA CommentLetter], https:// www.aicpa.org/advocacy/tax/downloadabledocuments/aicpa-comment-letter-on-notice2014-21-virtual-currency-6-10-16.pdf (inquiringas to which method taxpayers should use to reconcile the variability ofexchange rates).

(114.) See I.R.S. Notice, supra note 22 (failing to address how todetermine the fair market value in the absence of an exchange based onmarket supply and demand).

(115.) I.R.S. Notice, supra note 22 (clarifying that buyers andsellers refer to participants in a transaction for which virtualcurrency is used as consideration for goods or services).

(116.) I.R.S. Notice, supra note 22; See generally Kashmir Hill,How I Paid My Bitcoin Taxes, Forbes (Apr. 15, 2014),http://www.forbes.com/sites/kashmirhill/2014/04/15/how-ipaid-my-bitcoin-taxes/#4930c60c2c92 (providing an anecdote of paying bitcoin taxes).

(117.) I.R.S. Notice, supra note 22.

(118.) See I.R.S. Notice, supra note 22 (stating that "stocks,bonds, and other investment property are generally capitalassets"); see also I.R.S. Publication 544, Sales and OtherDispositions of Assets at 22-23 (2015) (describing when assets are notcapital assets); Capital Asset, Investopedia,http://www.investopedia.com/terms/c/capitalasset.asp (last visited Sept.24, 2016) ("Capital assets are significant pieces of property suchas homes, cars, investment properties, stocks, bonds, and evencollectibles or art.") ("For businesses, a capital asset is atype of asset with a useful life longer than a year, that is notintended for sale in the regular course of the business'soperation."). But see In re Coinflip, Inc., supra note 105 (statingthat the CFTC determined Bitcoin was a commodity).

(119.) Berry Dunn, Down the Rabbit Hole: Virtual CurrencyTransactions (June 13, 2014),http://www.berrydunn.com/news-detail/bitcoin-virtual-currency-transactions. But see Jean Folger, Intermediate Guide To E-Mini Futures Contracts- Tax Advantages, Investopedia,http://www.investopedia.com/university/intermediate-guide-to-trading-emini-futures/tax-advantages.asp (lasted visited on Sept. 16, 2016)(explaining how 60% of commodities futures are taxed at the long termcapital gains rate while 40% are taxed at the ordinary income rate).

(120.) BERRYDUNN, supra note 119.

(121.) I.R.S. Notice, supra note 22.

(122.) I.R.S. Notice, supra note 22.

(123.) I.R.S. Notice, supra note 22.

(124.) I.R.S. Notice, supra note 22; Treas. Inspector Gen. Report,supra note 106, at 12-13 (calling for Form W-2 and Form 1099 to beginhaving a separate place to report virtual currency).

(125.) Marco Santori, I.R.S. Guidance Further Legitimizes Bitcoinand Provides Clarity, but Demands Unrealistic Reporting, BITCOINFOUNDATION BLOG (Mar. 26, 2014), https://bitcoinfoundation.org/2014/03/irs-guidance-further-legitimizes-bitcoin-and provides-clarity-but-demands-unrealistic-reporting/. But see Hill,supra note 116 (discussing sendees that help users keep track of theirbitcoin transactions by allowing them to import their transactions).

(126.) Nika Antonikova, Real Taxes on Virtual Currencies: What Doesthe I.R.S. Say? 34 Va. Tax Rev. 433, 444-45 (2015).

(127.) John E. Elmore, Virtual Currency, Real Tax: Taxation andValuation Issues Related to Emerging Digital Payment Systems, EMERGINGTREND INSIGHTS 60, 68 (2015).

(128.) Id.

(129.) Jose Pagliery, New I.R.S. Rules Make Using Bitcoin a Fiasco,CNN (Mar. 31, 2014, 7:01 AM),http://money.cnn.com/2014/03/31/technology/irs-bitcoin/; see Treas.Inspector Gen. Report, supra note 106 (stating there has been"little evidence of coordination between the responsible functionsto identify and address, on a program level, potential taxpayernoncompliance issues for transactions involving virtualcurrencies").

(130.) Pagliery, supra note 129 (quoting Steven Rosentha of the TaxPolicy Center: "[n]obody in their right mind would ever comply withthat"); Elizabeth E. Lambert, The Internal Revenue Serv. &Bitcoin: A Taxing Relationship, 35 Va. Tax Rev. 88,110 (2015). The 2016Treasury Inspector General Report found that "nothing specific hasbeen done" to address the use of virtual currency to "dodgetaxes." However, cases have been brought against virtual currencyusers in regards to narcotics and money laundering. Thus, it is possibleto tie bitcoin users to a personal identity. Treas. Inspector Gen.Report, supra note 106, at 7.

(131.) Omri Marian, Assistant Professor of Law, University ofCalifornia Irvine School of law,http://www.law.uci.edu/faculty/iull-time/marian/ (last visited Sept. 24,2016) (stating that Prof. Marian is an expert in international taxationand taxation of financial institutions whose work focuses on the"administrative practices of tax haven jurisdiction").

(132.) Omri Marian, Are Cryptocurrencies Super Tax Havens?, 112MICH. L. Rev. First Impressions 38,42 (2013).

(133.) Id. at 45.

(134.) Josh Ungerman, Are Virtual Currencies the Next Offshore BankAccount for Tax Evaders?, Forbes (Oct. 3, 2014, 11:18 AM),http://www.forbes.com/sites/irswatch/2014/10/03/are-virtual-currencies-the-next-offshore-bank-account-for-tax-evaders/.

(135.) Id.

(136.) Id.

(137.) Antonikova. supra note 126, at 445 ("Although eachBitcoin has a record of ownership and can be eventually traced to theoriginal miner, it is very difficult to imagine how this information canbe used to identify the initial owner or force somebody to file aninformation return."); see also Fergus Hodgson, How the IRS LetBitcoin Pass it By, Tax Revolution Institute (Aug. 9, 2016),https://taxrevolution.us/how-the-irs-let-bitcoin-pass-it-by/ (explainingthat an attorney that specializes in the field has not "seen anaudit yet that specifically deals with bitcoin"); see Who isSatoshi Nakamoto? CoinDesk, http://www.coindesk.com/information/who-is-satoshi-nakamoto/ (last updated Feb. 19, 2016) (explaining thelengths journalists have gone to try to uncover the man behind the aliasSatoshi Nakamoto who started Bitcoin).

(138.) Theodore W. Reuter, Pitfalls of Paying Employees in Bitcoin,Advocate 39, 39 (2015) (highlighting how technology companies may wishto pay employees in bitcoin and that employees have asked to be paid inbitcoin).

(139.) Id. at 40.

(140.) Id.

(141.) Id.; Christine Lane & Gene Magidenko, The U.S. Fed.Taxation of Bitcoins & Other Convertible Virtual Currencies, 2014inside Basis 3,4(2014).

(142.) See Reuter, supra note 138, at 40 (explaining that employersmust "keep track of its basis (i.e. its buying price) for theBitcoin and also track the reasonable value of the market price ofBitcoin on pay day").

(143.) See Reuter, supra note 138, at 40. See generally Treas.Inspector Gen. Report, supra note 105, at 12 (calling for a bitcoinclassification on Form W-2).

(144.) Ky. Dep't of Rev., Ky. Sales Tax Facts (June 2014); TAXPOLICY Div. of Mich. Dep't of Treas., 1 Mich. Treas. Update 1, 2(Nov. 1, 2015) [hereinafter Mich. Dep't of Treas.]; N.J. Dep'tof Taxation, Technical Advisory Memorandum TAM2015-1 (R) (July 28,2015); N.Y. Dep't of Taxation, Technical Memorandum TSB-M14(5)C,(7)1, (17)S (Dec. 5, 2014); Wis. Dep't of Rev., News for TaxProfessionals (Mar. 28, 2014).

(145.) Ky. Dep't of Rev., Ky. Sales Tax Facts (June 2014); TAXPOLICY Div. of Mich. Dep't of Treas., 1 Mich. Treas. Update 1, 2(Nov. 1, 2015) [hereinafter Mich. Dep't of Treas.]; N.J. Dep'tof Taxation, Technical Advisory Memorandum TAM2015-1 (R) (July 28,2015); N.Y. Dep't of Taxation, Technical Memorandum TSB-M14(5)C,(7)1, (17)S (Dec. 5, 2014); Wis. Dep't of Rev., News for TaxProfessionals (Mar. 28, 2014).

(146.) Ky. Dep't of Rev., supra note 144; Mich. Dep't ofTreas., supra note 144; N.J. Dep't of Taxation, supra note 144;N.Y. Dep't of Taxation, supra note 144; Wis. Dep't of Rev.,supra note 144.

(147.) Ky. Dep't of Rev., supra note 144; Mich. Df.p't ofTreas., supra note 144; N.J. Dep't of Taxation, supra note 144;N.Y. Dep't of Taxation, supra note 144; Wis. Dep't of Rev.,supra note 144.

(148.) Ky. Dep't of Rev., supra note 144; Mich. Dep't ofTreas., supra note 144; N.J. Dep't of Taxation, supra note 144;N.Y. Dep't of Taxation, supra note 144; Wis. Dep't of Rev.,supra note 144.

(149.) Ky. Dep't of Rev., supra note 144; Mich. Dep't ofTreas., supra note 144; N.J. Dep't of Taxation, supra note 144;N.Y. Dep't of Taxation, supra note 144; Wis. Dep't of Rev.,supra note 144.

(150.) Ky. Dep't of Rev., supra note 144; Mich. Dep't ofTreas., supra note 144; N.J. Dep't of Taxation, supra note 144;N.Y. Dep't of Taxation, supra note 144; Wis. Dep't of Rev.,supra note 144.

(151.) N.J. Dep't of Taxation, supra note 144; N.Y. Dep'tof Taxation, supra note 144.

(152.) N.J. Dep't of Taxation, supra note 144; n.Y. Dep'tof Taxation, supra note 144.

(153.) N.J. Dep't of Taxation, supra note 144; N.Y. Dep'tof Taxation, supra note 144.

(154.) N.J. Dep't of Taxation, supra note 144; N.Y. Dep'tof Taxation, supra note 144.

(155.) N.J. Dep't of Taxation, supra note 144; N.Y. Dep'tof Taxation, supra note 144.

(156.) Ky. Dep't of Rev., supra note 144; Mich. Dep't ofTreas., supra note 144; N.J. Dep't of Taxation, supra note 144;N.Y. Dep't of Taxation, supra note 144; Wis. Dep't of Rev.,supra note 144.

(157.) K.y. Dep't of Rev., supra note 144; Mich. Dep't ofTreas., supra note 144; N.J. Dep't of Taxation, supra note 144;N.Y. Dep't of Taxation, supra note 144; Wis. Dep't of Rev.,supra note 144.

(158.) Ky. Dep't of Rev., supra note 144; Mich. Dep't ofTreas., supra note 144; N.J. Dep't of Taxation, supra note 144;N.Y. Dep't of Taxation, supra note 144; Wis. Dep't of Rev.,supra note 144.

(159.) Cal. Bd. of Equalization, Special Notice: Accepting VirtualCurrency as a Payment Method, L-382 (June 2014),https://www.boe.ca.gov/news/2014/1382.pdf; Wash. Dep't of Rev.,Accepting Virtual Currency as Payment for Goods and Serviceshttp://dor.wa.gov/Content/GetAFormOrPublication/PublicationBySubject/TaxTopics/ VirtualCurrency.aspx (last visited Sept. 30, 2016).

(160.) Cal. Bd. of Equalization, supra note 159; Wash. Dep'tof Rev., supra note 159.

(161.) Cal. Bd. of Equalization, supra note 159; Wash. Dep'tof Rev., supra note 159.

(162.) But see Jodi Helmer, How to Negotiate the Cost of Anything,CBS Money Watch (Jan. 28, 2011, 2:24 PM),http://www.cbsnews.com/news/how-to-negotiate-the-cost-of- anything/(noting that companies and retailers regularly negotiate with consumerson the price of certain products or services).

(163.) Cal. Bd. of Equalization, supra note 159; Wash. Dep'tof Rev., supra note 159.

(164.) N.J. Dep't of Taxation, supra note 144; N.Y. Dep'tof Taxation, supra note 144.

(165.) N.J. Dep't of Taxation, supra note 144; N.Y. Dep'tof Taxation, supra note 144.

(166.) N.J. Dep't of Taxation, supra note 144; N.Y. Dep'tof Taxation, supra note 144.

(167.) N.J. Dep't of Taxation, supra note 144.

(168.) Reuter, supra note 138, at 40 ("A commitment to payemployees in bitcoins means that the company's withholdingobligations and wage related taxes and expenses are likely to fluctuatewith each pay period.")

(169.) See An Act to Simplify the N.C. Tax Structure and to ReduceIndividual and Business Tax Rates ("Tax Simplification andReduction Act") [section] 3.1(a), N.C. Gen. Stat. [section]105-164.4(a) (2016) (highlighting that modular homes will now be taxedand the general sales tax rate).

(170.) See infra note 187.

(171.) See Ky. Dep't of Rev., supra note 144, at 1 (statingthat the fair market value of bitcoin at the time of the transaction isthe basis); Mich. Dep't of Treas., supra note 144, at 2 (statingthat a "taxpayer accepting virtual currency must also maintaindocumentation demonstrating the value of the virtual currency on the dayand at the exact time of the transaction"); N.J. Dep't ofTaxation, supra note 144 (stating that retailers must record the dollarvalue amount of virtual currency at the time of the transaction); N.Y.Dep't of Taxation, supra note 144, at 2 (stating that sales tax is"based on the market value of the convertible virtual currency atthe time of the transaction, converted to U.S. dollars"); Wis.Dep't of Rev., supra note 144 (stating that the sales tax basis isthe fair market value on the day of the sale); Cal. Bd. of Equalization,supra note 159 (stating that the advertised price is the basis for salestax); Wash. Dep't of Rev., supra note 159 (stating that the taxbasis is the dollar value that the retailer would accept).

(172.) See Bajpai, supra note 40 (establishing that Bitcoin is themost popular form of virtual currency); Ky. Dep't of Rev., supranote 144, at 1 (stating that the fair market value of bitcoin at thetime of the transaction is the basis); Mich. Dep't of Treas., supranote 144, at 2 (stating that a "taxpayer accepting virtual currencymust also maintain documentation demonstrating the value of the virtualcurrency on the day and at the exact time of the transaction");N.J. Dep't of Taxation, supra note 144 (stating that retailers mustrecord the dollar value amount of virtual currency at the time of thetransaction); N.Y. Dep't of Taxation, supra note 144, at 2 (statingthat sales tax is "based on the market value of the convertiblevirtual currency at the time of the transaction, converted to U.S.dollars"); Wis. Dep't of Rev., supra note 144 (stating thatthe sales tax basis is the fair market value on the day of the sale);Cal. Bd. of Equalization, supra note 159 (stating that the advertisedprice is the basis for sales tax); Wash. Dep't of Rev., supra note159 (stating that the tax basis is the dollar value that the retailerwould accept).

(173.) Tax Simplification and Reduction Act [section][section]1.2(a), 7(a), N.C. Gen. Stat. [section][section] 105-153.7(a),105-241.10 (2016).

(174.) See Mark Binker, Breaking Down the 2013 Tax Package, WRAL(July 19, 2013), http://www.wral.com/breaking-down-the-2013-tax-package/12678653/ (discussing the change to a flat rate income tax and the shiftaway from preferential sales tax rates on certain goods and services).

(175.) N.C. Gen. Stat. [section] 105-164.4(a).

(176.) See Ky. Dep't of Rev., supra note 144, at 1 (statingthat the fair market value of bitcoin at the time of the transaction isthe basis); Mich. Dep't of Treas., supra note 144, at 2 (statingthat a "taxpayer accepting virtual currency must also maintaindocumentation demonstrating the value of the virtual currency on the dayand at the exact time of the transaction"); N.J. Dep't ofTaxation, supra note 144 (stating that retailers must record the dollarvalue amount of virtual currency at the time of the transaction); N.Y.Dep't of Taxation, supra note 144. at 2 (stating that sales tax is"based on the market value of the convertible virtual currency atthe time of the transaction, converted to U.S. dollars"); Wis.Dep't of Rev., supra note 144 (stating that the sales tax basis isthe fair market value on the day of the sale); Cal. Bd. of Equalization,supra note 159 (stating that the advertised price is the basis for salestax); Wash. Dep't of Rev., supra note 159 (stating that the taxbasis is the dollar value that the retailer would accept).

(177.) Tax Simplification and Reduction Act [section] 3.1(a), N.C.Gen. Stat. [section] 105-164.4(la) (eliminating the preferential salestax rate on items such as modular homes and applying the general salestax rate); see also Binker, supra note 174 (discussing the change to aflat rate income tax and the shift away from preferential sales taxrates on certain goods and services).

(178.) See generally Ky. Dep't of Rev., supra note 144, at 1(stating that the fair market value of bitcoin at the time of thetransaction is the basis); Mich. Dep't of Treas., supra note 144.at 2 (stating that a "taxpayer accepting virtual currency must alsomaintain documentation demonstrating the value of the virtual currencyon the day and at the exact time of the transaction"); N.J.DEP't of Taxation, supra note 144 (stating that retailers mustrecord the dollar value amount of virtual currency at the time of thetransaction); N.Y. Dep't of Taxation, supra note 144, at 2 (statingthat sales tax is "based on the market value of the convertiblevirtual currency at the time of the transaction, converted to U.S.dollars"); Wis. Dep't of Rev., supra note 144 (stating thatthe sales tax basis is the fair market value on the day of the sale);Cal. Bd. of Equalization, supra note 159 (stating that the advertisedprice is the basis for sales tax); Wash. Dep't of Rev., supra note159 (stating that the tax basis is the dollar value that the retailerwould accept).

(179.) See Cal. Bd. of Equalization, supra note 159 (stating thatthe advertised price is the basis for sales tax); Wash. Dep't ofRev., supra note 159 (stating that the tax basis is the dollar valuethat the retailer would accept).

(180.) Ben DeMeter, The Complete Guide to Buying a New Car: How toNegotiate Prices, Investopedia,http://www.invcstopedia.com/university/newcar/negotiate-price.asp (lastvisited Sept. 17, 2016); see Martha C. White, 12 Things You ShouldAlways Haggle Over, Time (Aug. 6, 2012),http://business.time.com/2012/08/13/12-things-you-shouldalways-haggle-over/slide/2-home-and- yard-work-contracts/ (listing automobiles, home andyard-work contracts, furniture, credit-card costs, special-events goodsand services, anything bought used or in bulk, jewelry, vacationlodging, health care, insurance rates, phone service, televisionservice, internet service, and subscriptions and memberships as productsand services that may not necessarily be sold at the advertised price).

(181.) See generally Ky. Dep't of Rev., supra note 144, at 1(stating that the fair market value of bitcoin at the time of thetransaction is the basis); Mich. Dep't of Treas., supra note 144,at 2 (stating that a "taxpayer accepting virtual currency must alsomaintain documentation demonstrating the value of the virtual currencyon the day and at the exact time of the transaction"); N.J.Dep't of Taxation, supra note 144 (stating that retailers mustrecord the dollar value amount of virtual currency at the time of thetransaction); N.Y. Dep't of Taxation, supra note 144, at 2 (statingthat sales tax is "based on the market value of the convertiblevirtual currency at the time of the transaction, converted to U.S.dollars"); Wis. Dep't of Rev., supra note 144 (stating thatthe sales tax basis is the fair market value on the day of the sale).

(182.) See generally Helmer, supra note 162 (noting that companiesand retailers regularly negotiate with consumers on the price of certainproducts or services).

(183.) See generally Ky. Dep't of Rev., supra note 144, at 1(stating that the fair market value of bitcoin at the time of thetransaction is the basis); mich. Dep't of Treas., supra note 144,at 2 (stating that a "taxpayer accepting virtual currency must alsomaintain documentation demonstrating the value of the virtual currencyon the day and at the exact time of the transaction"); N.J.Dep't of Taxation, supra note 144 (stating that retailers mustrecord the dollar value amount of virtual currency at the time of thetransaction); N.Y. Dep't of Taxation, supra note 144, at 2 (statingthat sales tax is "based on the market value of the convertiblevirtual currency at the time of the transaction, converted to U.S.dollars"); Wis. Dep't of Rev., supra note 144 (stating thatthe sales tax basis is the fair market value on the day of the sale).

(184.) How to Accept Bitcoin for Small Businesses, Bitcoin Wiki,https://en.bitcoin.it/ wiki/How_to_accept_Bitcoin,_for_small_businesses(last visited Sept. 13, 2016) [hereinafter Bitcoin Wiki],

(185.) Id.

(186.) See Selkis, supra note 112 (stating that the value ofBitcoin has varied as much as 20% among different exchanges).

(187.) See generally Dineen, supra note 54 (interviewing a smallbusiness owner who believes that accepting bitcoin will be a "goodinvestment").

(188.) Id.

(189.) Ky. Dep't of Rev., supra note 144, at 1; Mich.Dep't of Treas., supra note 144, at 2; N.J. Dep't of Taxation,supra note 144; N.Y. Dep't of Taxation, supra note 144, at 2; Wis.Dep't of Rev., supra note 144.

(190.) I.R.S. Notice, supra note 22.

(191.) See Jeffrey K. Berns & Emmanuel Rayes, Berns Weiss LLP,Virtual Currency Legislation on the Horizon (July 14, 2016, 7:35 PM),http:// www.law111.com/virtual-currency-legislation-on-the-horizon(describing former Congressman Stockman's efforts to change the taxtreatment and calling on individuals to encourage their representativesto change the classification in the wake of the request forclarification by the American Institute of Certified PublicAccountants); see also Treas. Inspector Gen. Report, supra note 106, at11 (expressing concerns over the current IRS guidance) ("Withquestions that the public has about recordkeeping, mining, and taxcompliance reporting for virtual currencies, some potential fornoncompliance exists because the detailed guidance needed by taxpayersto properly comply with their virtual currency tax obligations was notprovided by the IRS."); Hodgson, supra note 137 ("To verifythe depth the problem, even the authors themselves struggled to explainthe meaning of their 2014 notice. Simple questions, such as how onewould go about computing gains and reporting them for every transaction,had them deflecting to other coauthors and finally to mediarelations--even though they listed themselves as the contacts on thenotice.").

(192.) Berns & Rayes, supra note 191.

(193.) Online Market Protection Act of 2014, 11.R. 5892, 113thCong. [section] 5(c) (2015). While the bill did not make it out ofcommittee, President Trump's goal of simplifying the tax code maymake a change more likely going forward. See generally Jim Nunns et al.,Tax Policy Center, An Analysis of Donald Trump's Tax Plan 2 (Dec.22, 2015), http:/ /www.taxpohcycenter.org/sites/default/files/publication/128726/2000560-an-analysis-of-donald-trumps-tax-plan.pdf (stating thatPresident Trump has expressed the goal of "simplifying the taxcode").

(194.) Online Market Protection Act of 2014, H.R. 5892, 113th Cong.[section] 5(c) (2015).

(195.) AICPA Comment Letter, supra note 113, at 3 (seekingclarification as to when virtual currency transactions would beconsidered like kind transactions); Hodgson, supra note 137, at 2.

(196.) AICPA Comment Letter, supra note 113; Hodgson, supra note137, at 2.

(197.) AICPA Comment Letter, supra note 113, at 4-5; Mike Godfrey,US Accountants Seek Virtual Currency Tax Guidance, Tax-News (June 16,2016), http://www.taxnews.com/news/US_Accountants_Seek_Virtual_Currency_Tax_Guidance_71466.html.

(198.) Hodgson, supra note 137, at 2-3.

(199.) Hodgson, supra note 137, at 3.

(200.) See generally Hodgson, supra note 137, at 2 (highlightingthe "clout of the Institute of CPAs").

(201.) Income Tax Treatment of Virtual Currencies, Inland RevenueAuthority of Sing., https://www.iras.gov.sg/irashome/Businesses/Companies/Working-out-Corporate-IncomeTaxes/Specific-topics/Income-Tax-Treatment-of-Virtual-Currencies/ (Sing.) (last visited Sept. 17, 2016).

(202.) Case C-264/14, Skatteverket v. Hedqvist, 2015 E.C.R.614CJ0264 (2015).

(203.) Stan Higgins, Bitcoin Sales are Foreign CurrencyTransactions, Russia's Tax Office Says, Coin Desk (Aug. 10, 2016,12:47 PM), http://www.coindesk.com/bitcoin-currency-russia-ministry-finance- tax/.

(204.) Japan Bitcoin a Currency but Still Taxable, Avalara VAT live(Mar. 10, 2016), http://www.vatlive.com/asia-pacific/japan-bitcoin-a-currency-but-still-taxable/.

(205.) See generally I.R.S. Notice, supra note 22 (establishingthat the I.R.S. Notice was promulgated in 2014).

(206.) Tax Treatment of Crypto-Currencies in Australia-Specifically Bitcoin, Austl. Tax Office (last modified Dec. 18, 2014),https://www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia--specifically-bitcoin/(Austl.).

(207.) See id. (noting that individuals who use Bitcoin forpersonal transactions that do not exceed $10,000 will not be subject toGST or income taxes in Australia).

(208.) See Online Market Protection Act of 2014, H.R. 5892, 113thCong. [section] 5(c) (2015) ("At present, a taxpayer acceptingcryptocurrency for goods or services will be taxed on the fair marketvalue of the cryptocurrency despite the fact that exchange rates (fromcryptocurrency to conventional currency) are both highly volatile andpublished or available only on a small number of proto-exchanges in theearly stages of development, acceptance and awareness by cryptocurrencyusers."); see also AICPA Comment Letter, supra note 113, at 1-2(illustrating the variability of bitcoin).

(209.) BucorN Wiki, supra note 184.

(210.) Dineen, supra note 54.

(211.) Ky. Dep't of Rev., supra note 144, at 1; Mich.Dep't of Treas., supra note 144, at 2; N.J. Dep't of Taxation,supra note 144; N.Y. Dep't of Taxation, supra note 144. at 2; Wis.Dep't of Rev., supra note 144.

(212.) I.R.S. Notice, supra note 22.

(213.) See I.R.S. Notice, supra note 22 (stating that the tax basisis the "fair market value of the virtual currency in U.S. dollarsas of the date of receipt").

(214.) See generally Ky. Dep't of Rev., supra note 144, at 1(stating that the fair market value of bitcoin at the time of thetransaction is the basis); Mich. Dep't of Treas., supra note 144,at 2 (stating that a "taxpayer accepting virtual currency must alsomaintain documentation demonstrating the value of the virtual currencyon the day and at the exact time of the transaction"); N.J.Dep't of Taxation, supra note 144 (stating that retailers mustrecord the dollar value amount of virtual currency at the time of thetransaction); N.Y. Dep't of Taxation, supra note 144. at 2 (statingthat sales tax is "based on the market value of the convertiblevirtual currency at the time of the transaction, converted to U.S.dollars"); Wis. Dep't of Rev., supra note 144 (stating thatthe sales tax basis is the fair market value on the day of the sale).

(215.) See generally cal. Bd. of equalization, supra note 159(stating that the advertised price is the basis for sales tax); Wash.Dep't of Rev., supra note 159 (stating that the tax basis is thedollar value that the retailer would accept).

(216.) See generally Ky. Dep't of Rev., supra note 144, at 1(stating that the fair market value of bitcoin at the time of thetransaction is the basis); Mich. Dep't of Treas., supra note 144.at 2 (stating that a "taxpayer accepting virtual currency must alsomaintain documentation demonstrating the value of the virtual currencyon the day and at the exact time of the transaction"); N.J.Dep't of Taxation, supra note 144 (stating that retailers mustrecord the dollar value amount of virtual currency at the time of thetransaction); N.Y. Dep't of Taxation, supra note 144, at 2 (statingthat sales tax is "based on the market value of the convertiblevirtual currency at the time of the transaction, converted to U.S.dollars"); Wis. Dep't of Rev., supra note 144 (stating thatthe sales tax basis is the fair market value on the day of the sale);Cal. Bd. of Equalization, supra note 159 (stating that the advertisedprice is the basis for sales tax); Wash. Dep't of Rev., supra note159 (stating that the tax basis is the dollar value that the retailerwould accept).

(217.) See Bajpai, supra note 40 (establishing that Bitcoin is themost popular form of virtual currency); Ky. Dep't of Rev., supranote 144, at 1 (stating that the fair market value of bitcoin at thetime of the transaction is the basis); Mich. Dep't of Treas., supranote 144, at 2 (stating that a "taxpayer accepting virtual currencymust also maintain documentation demonstrating the value of the virtualcurrency on the day and at the exact time of the transaction");N.J. Dep't of Taxation, supra note 144 (stating that retailers mustrecord the dollar value amount of virtual currency at the time of thetransaction); N.Y. Dep't of Taxation, supra note 144, at 2 (statingthat sales tax is "based on the market value of the convertiblevirtual currency at the time of the transaction, converted to U.S.dollars"); Wis. DEP't of Rev., supra note 144 (stating thatthe sales tax basis is the fair market value on the day of the sale).

(218.) Cf. Selkis, supra note 112 (stating that the value ofbitcoin has varied as much as 20% among different exchanges); Dineen,supra note 54 (discussing how the bar owner sees Bitcoin as aninvestment).

(219.) Bajpai, supra note 40.

(220.) See generally Ky. Dep't of Rev., supra note 144, at 1(stating that the fair market value of bitcoin at the time of thetransaction is the basis); Mich. Dep't of Treas., supra note 144,at 2 (stating that a "taxpayer accepting virtual currency must alsomaintain documentation demonstrating the value of the virtual currencyon the day and at the exact time of the transaction"); N.J.Dep't of Taxation, supra note 144 (stating that retailers mustrecord the dollar value amount of virtual currency at the time of thetransaction); N.Y. Dep't of Taxation, supra note 144, at 2 (statingthat sales tax is "based on the market value of the convertiblevirtual currency at the time of the transaction, converted to U.S.dollars"); Wis. Dep't of Rev., supra note 144 (stating thatthe sales tax basis is the fair market value on the day of the sale);

(221.) Cal. Bd. of Equalization, supra note 159 (stating that theadvertised price is the basis for sales tax); Wash. Dep't of Rev.,supra note 159 (stating that the tax basis is the dollar value that theretailer would accept).

(222.) See Rizzo, supra note 55 (stating that Reeds Jewelers"isn't ruling out one day accepting altcoins").

(223.) Selkis, supra note 112.

(224.) Accepting Virtual Currency: The Basics for Brick-and-MortarRetailers, virtual Currency Today (Dec. 15, 2014),http://www.virtualcurrencytoday.com/articles/accepting-virtual-currency-the-basics-for-brick-and-mortar-retailers/.

(225.) See id. (quoting TigerDirect's Director of Marketing,Steve Leads, "We never touch bitcoins, so we don't have a taxliability.").

(226.) Id.

(227.) See generally How to Accept Bitcoin Payments for Your Store,CoinDesk, http:// www.coindesk.com/information/bitcoin-retail-pos-systems/ (last updated Oct. 14, 2015) (highlighting different options forpayment processors for retailers who wish to accept bitcoin).

(228.) See N.J. Dep't of Taxation, supra note 144 (statingthat retailers must record the dollar value amount of virtual currencyat the time of the transaction); N.Y. Dep't of Taxation, supra note144, at 2 (stating that sales tax is "based on the market value ofthe convertible virtual currency at the time of the transaction,converted to U.S. dollars"); I.R.S. Notice, supra note 22(describing the reporting requirements for income tax based on theproperty classification).

(229.) Treas. Inspector Gen. Report, supra note 106, at 7;Ungerman, supra note 134 (noting that the I.R.S. has tasked specialagents with trying to figure out how to trace tax evasion).

(230.) Ungerman, supra note 134; see Bill Bischoff, Worried AboutBeing Audited by the IRS? Here are your Chances, MarketWatch (Jan. 29,2016, 2:57 PM), http:// www. marketwatch.com/story/what-are-your-chances-of-getting-audited-2015-12-15(discussing the low likelihood of being audited, 0.9% for individualswithout business income).

(231.) Hodgson, supra note 137; see Treas. Inspector Gen. Report,supra note 129, at 7 (noting that steps have not been taken to ferretout tax dodgers).

(232.) N.J. Dep't of Taxation, supra note 144; N.Y. Dep'tof Taxation, supra note 144.

(233.) See generally I.R.S. Notice, supra note 22 (describing howthe I.R.S. treats income in virtual currency).

(234.) Online Market Protection Act of 2014, H.R. 5892, 113th Cong.(2015); Sam Hampton, Undermining Bitcoin, 11 Wash. J.L. Tech. & Arts331, 348 (2016).

(235.) Hampton, supra note 234, at 248.

(236.) Cf. Hampton, supra note 234, at 348-49; Antonikova, supranote 126. at 450.

(237.) I.R.C. [section] 988(e) (2015).

(238.) Godfrey, supra note 197.

(239.) Elizabeth E. Lambert, The Internal Revenue Serv. &Bitcoin: A Taxing Relationship, 35 Va. Tax Rev. 88, 114 (2015); seeMarco Santori, supra note 125 (referring to the current reportingrequirements as "unnecessarily cumbersome").

(240.) See Antonikova, supra note 126, at 450 (stating thattreating virtual currency as foreign currency would be "immenselymore convenient than income taxation under property rules").

(241.) I.R.C. [section][section] 987, 989(a); Antonikova, supranote 126, at 450-51 ("[QBUs] may use a simplified profit and lossmethod to calculate income and exchange gains and losses under Subpart Jsection 987.").

(242.) I.R.C. [section] 989(a).

(243.) I.R.C. [section] 985(b)(1)(B) (defining functional currencyas "currency of the economic environment in which a significantpart of such unit's activities are conducted and which is used bysuch unit in keeping its books and records").

(244.) I.R.C. [section] 987; Antonikova, supra note 126, at 451.

(245.) I.R.C. [section] 987; Antonikova, supra note 126, at 451.

(246.) I.R.S. Notice, supra note 22.

(247.) Tax Navigator, supra note 3 ("North Carolina does notaddress the tax treatment of Bitcoin or other virtual currency.").

(248.) N.C. Gen. Stat. [section][section] 53-208.41-.64 (2016).

(249.) I.R.C. [section] 987(3)(b); Antonikova, supra note 126, at451.

(250.) Antonikova, supra note 126, at 449-50.

(251.) Antonikova, supra note 126, at 449-50.

(252.) Antonikova, supra note 126. at 450.

(253.) Antonikova. supra note 126, at 450.

(254.) Antonikova, supra note 126, at 450 (citing Steven Chung,Real Taxation of Virtual Commerce, 28 Va. Tax Rev. 733, 766 (2009)).

(255.) See generally I.R.S. Notice, supra note 22 (describing howthe I.R.S. treats income in virtual currency). "If the fair marketvalue of property received in exchange for virtual currency exceeds thetaxpayer's adjusted basis of the virtual currency, the taxpayer hastaxable gain." Id. "The taxpayer has a loss if the fair marketvalue of the property received is less than the adjusted basis of thevirtual currency." Id.

(256.) See Pagliery, supra note 129 (emphasizing how the propertyclassification will be difficult to enforce); see also Treas. InspectorGen. Report, supra note 106, at 7 (discussing the inadequacy ofenforcement procedures).

(257.) Ungerman, supra note 134.

(258.) See Binker, supra note 174 (providing a summary of the 2013North Carolina tax reforms); Dan Way, Rucho: Lawmakers Not Done with TaxReform, Carolina Journal (Dec. 9, 2015, 12:00 AM),https://www.carolinajournal.com/news-article/rucho-lawmakersnot-done-with-tax-reform/ (quoting Representative Lewis, who said "fw]e believethat what someone truly consumes is what should be taxed," whenasked about switching to a consumption based tax system).

(259.) N.C. Gen. Stat. [section] 105-153.7 (2016) (imposing a flattax on income); Joseph R. Santoro & Caleb S. Fuller, Reassessing theFair Tax, 77 U. Pitt. L. Rev. 385, 393 n.57 (2016) (explaining thatsales taxes are "inherently regressive").

(260.) See Tourism Statistics for North Carolina, visit NC (Dec. 7,2016), https:// media.visitnc.com/news/tourism-statistics-for-north-carolina ("Tourism is one of North Carolina's largestindustries.").

(261.) See Lyle Moran, How Nine States Without Income Taxes Pay theBills. Bos. U. (Nov. 4, 2008),http://www.bu.edu/phpbin/news-cms/news/?dept=l 368&id=51338(explaining how Florida and other states rely on sales taxes for amajority of state revenue).

(262.) See Elaine Povich, States Lure Tourists Then Tax Them, pewCharitable Trust (June 15, 2015),http://www.pewtrusts.Org/en/research-and-analysis/blogs/stateline/2015/6/ 15/states-lure-tourists-then-tax-them (stating that Ga.'s tourismindustry increased by 6.7% and set a record despite adding a hotel tax)(highlighting that in the fifty most traveled cities tourists pay 58%more in their combined tax bill than residents pay on state taxes); seealso Carl Bialik, Greece Hopes Foreign Tourists Will Help Pay Its Debts,Five Thirty Eight (July 15. 2016),http://fivethirtyeight.com/datalab/greece-hopes-foreign-tourists-will-help-pay-its-debts/ (stating that economic health in visitors' homeeffects tourism more than sales taxes); Nishaal Gooroochurn & ChrisMilner, Accessing Indirect Tax Reform in Tourism Dependent DevelopingCountry, 33 World Dev., No. 7, 1183, 1194 (2005) (calling for anincrease in sales taxes on items that tourists typically buy inMauritius). The amount that sales taxes would have to be raised to berevenue neutral, which is beyond the scope of this Note. However, as abaseline, Tennessee has a 5% state sales tax on food and a 7% tax onother items to compensate for not having an income tax. Tenn. Code Ann.[section] 67-6-202 and 228 (West 2016).

(263.) Tax Simplification and Reduction Act [section] 1.2(a), N.C.Gen. Stat. [section] 105-153.7; Binker, supra note 174.

(264.) Corporate Income Tax Information, Tax Rate, N.C. Dep'tof Rev., http:// www.dor.state.nc.us/taxes/corporate/rate.html (lastvisited Sept. 18, 2016).

(265.) Tax Simplification and Reduction Act [section] 2.1(a), N.C.Gen. Stat. [section] 105-130.3.

(266.) N.C. Dep't of Rev. Income Tax Div., Important Notice:The Secretary of Revenue confirms that net General Fund tax collectionsfor fiscal year 2015-2016 exceeded the targeted amount of$20,975,000,000. The corporate tax rate for years beginning on or afterJanuary 1, 2017 will be reduced by 1% (Aug. 4, 2016),http://www.dornc.com/taxes/income/impnotice080416_triggerratereduction.pdf.

(267.) Tax Simplification and Reduction Act [section] 3.1(a), N.C.Gen. Stat. [section] 105-164.4; Binker, supra note 174.

(268.) Tax Simplification and Reduction Act [section] 3.4(c), N.C.Gen. Stat. [section]105-467(b).

(269.) Tax Simplification and Reduction Act [section] 3.2(b), N.C.Gen. Stat. [section]105-164.13(26); Binker, supra note 174.

(270.) Tax Simplification and Reduction Act [section] 3.2(c), N.C.Gen. Stat. [section]105-164.15A; Colin Campbell, Sales Taxes on AutoRepairs, Dozens of Other Services Start Tuesday, News and Observer (Feb.27, 2016, 4:28 PM), http://www.newsobserver.com/news/politics-government/state-politics/article62898522.html.

(271.) See Way, supra note 256 (quoting Representative Lewis,saying "[w]e believe that what someone truly consumes is whatshould be taxed," when asked about switching to a consumption basedtax system). See generally Tax Simplification and Reduction Act[section] 5(b), N.C. Gen. Stat. [section]105-164.4 (amending the taxcode to eliminate special tax rates for items that were previously taxedat a lower rate and eliminating the special tax rate for modular homes).

(272.) Patrick Gleason, Significant State Changes of 2015 &Those on the 2016 Agenda, Forbes (Dec. 31, 2015, 12:25 PM),http://www.forbes.com/sites/patrickgleason/2015/12/ 3l/state-tax-changes/#208df4f859ca.

(273.) See William G. Gale, Don't Buy the Sales Tax, brookingsInst. (Mar. 1, 1998),https://www.brookings.edu/research/dont-buy-the-sales-tax/ ("Thesales tax would tax consumption at a flat rate compared to the currentsystem, which taxes income at progres sive rates.") ("Ifhouseholds are classified by annual income, the sales tax is sharplyregressive.") (stating that based on consumption level allhouseholds would pay less if the federal income tax was changed to asales tax).

(274.) Santoro & Fuller, supra note 259, at 393-94.

(275.) N.C. Gen. Stat. [section] 105-153.7.

(276.) See generally N.C. Gen. Stat. [section] 105-153.7(establishing the flat income tax in North Carolina with limiteddeductions from income).

(277.) See Santoro & Fuller, supra note 259, at 393-94 n.57(discussing the impact of a national sales tax on lower incomeindividuals).

(278.) Tim Worstall, A Flat Tax Isn't Regressive, It'sProgressive, Forbes (Nov. 12, 2015, 9:36 AM),http://www.forbes.com/sites/timworstall/2015/11/12/a-flat-tax-isntregressive-its-progressive/#371 d92dd2d25.

(279.) Id.

(280.) Binker, supra note 174.

(281.) See generally Santoro & Fuller, supra note 274, at 394(discussing another mechanism for lessening the impact of a sales tax onlower income individuals, the probate tax, as envisioned in the Fair Taxproposal).

(282.) See generally Santoro & Fuller, supra note 274, at 404(noting that income taxes discourage saving).

(283.) See generally Santoro & Fuller, supra note 274, at 404(noting that income taxes discourage saving).

(284.) Consumer Interest Rates, Bloomberg MarketWatch, http://www.bloomberg.com/markets/rates-bonds/consumer-interest-rates (lastvisited Sept. 18, 2016).

(285.) C.W., Why Negative Interest Rates Have Arrived-and Why TheyWon't Save the Global Economy, The Economist (Feb. 18, 2015, 11:50PM), http://www.economist.com/blogs/economist-explains/2015/02/economist-explains-15.

(286.) Scott Drenkard & Nicole Kaeding, State and Local TaxRates in 2016, Tax Found. (Mar. 9, 2016).http://taxfoundation.org/article/state-and-local-sales-tax-rates-2016.

(287.) See Tenn. Dep't of Rev. (Dec. 1, 2016),https://tn.gov/assets/entities/revenue/ attachments/taxlist.pdf; Tenn.Code Ann. [section] 67-6-202 and 228 (West 2016) (stating that Tennesseeallows a local tax of up to 2.75% on top of its state sales tax of 7%).

(288.) See S.C. Dep't of Rev., Sales and Use Tax Rates ofSouth Carolina (May 26, 2016),https://dor.sc.gov/tax-index/sales-and-use/Sales%20Notices/ST427_05262016.pdf (stating that South Carolina has a state sales tax of 6% andallows multiple local taxs which results in a local tax of 2.5% in thecounties with the highest sales tax).

(289.) See Ga. Dep't of REV., Ga. Sales and Use Tax Chart Oct.2016, https:// dor.georgia.gov/sites/dor.georgia.gov/files/related_files/document/LGS/Distributions/ LGS_2016_Oct_Rate_Chart.pdf (last visitedNov. 5, 2016) (showing that Georgia allows up to an 8% total sales tax,including the 4% state sales tax).

(290.) N.C. Gen. Stat. [section] 105-164.4(a) (2016) (stating thatthe state sales tax is 4.75%); see also N.C. Dep't of Rev, Salesand Use Rates Effective Oct. 1, 2016, http://dornc.com/taxes/sales/salesrates l 0-16.html (last visited Nov. 5, 2016) (statingthat a 2.75% local sales tax is allowed in addition to the state tax,totaling 7.5%).

(291.) Va. Code Ann. [section] 58.1-603 and 605 (West 2016)(stating that Virginia has a state sales tax of 4.3% and allows a localtax of up to 1%).

(292.) See S.C. Dep't of Rev., Sales and Use Tax Rates ofSouth Carolina (May 26, 2016),https://dor.sc.gov/tax-index/sales-and-use/Sales%20Notices/ST427_05262016.pdf (stating that South Carolina has a state sales tax of 6%, which isthe combined rate for some counties); see also N.C. Gen. Stat. [section]105-164.4(a) (2016) (stating that the state sales tax is 4.75%); N.C.Dep't of Rev, Sales and Use Rates Effective Oct. I. 2016,http://dornc.com/ taxes/sales/salesrates_10-16.html (last visited Nov.5, 2016) (stating that the lowest combined rate is 6.75%).

(293.) See N.C. Gen. Stat. [section] 105-164.4(a) (2016) (statingthat the state sales tax is 4.75%); N.C. Dep't of Rev., supra note288 (stating that a 2.75% local sales tax is allowed in addition to thestate tax, totaling 7.5% in N.C.); see also Va. Code Ann. [section]58.1-603 and 605 (West 2016) (stating that Virginia has a state salestax of 4.3% and allows for a local tax of up to 1%); S.C. Dep't ofRev., Sales and Use Tax Rates of South Carolina (May 26, 2016),https://dor.sc.gov/tax-index/sales-and-use/Sales%20Notices/ST427_05262016.pdf (stating that South Carolina has a state sales tax of 6%, which isthe combined rate for some counties).

(294.) See Thomas Frohlich, States with No Individual Income Tax,USA Today (Mar. 19, 2016, 8:34 AM),http://www.usatoday.com/story/money/personalfinance/2016/03/19/states-no-individual-income-tax/81965082/ (discussing how some stateswith no individual income tax have higher property taxes).

(295.) See Josh Barro, The Inevitable, Indispensable Property Tax,N.Y. TIMES (July 4, 2015),http://www.nytimes.com/2015/07/05/business/the-inevitable-indispensable-propertytax.html?_r=0 (explaining that property taxes are "moreprogressive than sales taxfes]").

(296.) See About Sales Tax, Amazonhttps://www.amazon.com/gp/hclp/customer/ display.html?nodeId=468512(last visited Dec. 16, 2016) ("If an item is subject to sales taxin the state to which the order is shipped, tax is generally calculatedon the total selling price of each individual item. In accordance withstate tax laws, the total selling price of an item will generallyinclude item-level shipping and handling charges, item-level discounts,gift-wrap charges, and an allocation of order-level shipping andhandling charges and order-level discounts."); Leroy Baker, AmazonSurprises by Starting North Carolina Sales Tax Collection, Tax-News(Jan. 23, 2014), http://www.tax-news.com/news/ Amazon Surprises ByStarting North Carolina Sales Tax Collections 63445.html (stating thatAmazon had agreed to collect sales taxes on N.C. residents). Seegenerally Quill Corp. v. North Dakota, 112 S. Ct. 1904, 1913-14 (1992)(stating that a "corporation may have the "minimumcontacts" with a taxing State as required by the Due ProcessClause, and yet lack the "substantial nexus" with that Stateas required by the Commerce Clause") (holding that an onlineretailer must have a "physical presence" with a state to berequired to collect sales taxes).

(297.) See About Sales Tax, Amazonhttps://www.amazon.com/gp/help/customer/ display.html?nodeId=468512(last visited Dec. 16, 2016).

(298.) N.C. Gen. Stat. [section] 53-208.41-64 (2016).

(299.) Tax Navigator, supra note 3 ("North Carolina does notaddress the tax treatment of Bitcoin or other virtual currency.").

(300.) Ky. Dep't of Rev., supra note 144; Mich. Dep't ofTreas., supra note 144; N.J. Dep't of Taxation, supra note 144;N.Y. Dep't of Taxation, supra note 144; Wis. Dep't of Rf.v.,supra note 144; Cal. Bd. of Equalization, supra note 159; Wash.Dep't of Rev., supra note 159.

(301.) See generally, N.C. Gen. Stat. [section] 105-153.7 (2016)(highlighting that modular homes will now be taxed and the general salestax rate); see also Binker, supra note 174 (discussing the change to aflat rate income tax and the shift away from preferential sales taxrates on certain goods and services).

(302.) See generally Ky. Dep't of Rev., supra note 144, at 1(stating that the fair market value of bitcoin at the time of thetransaction is the basis); MICH. Dep't of Treas., supra note 144,at 2 (stating that a "taxpayer accepting virtual currency must alsomaintain documentation demonstrating the value of the virtual currencyon the day and at the exact time of the transaction"); N.J.Dep't of Taxation, supra note 144 (stating that retailers mustrecord the dollar value amount of virtual currency at the time of thetransaction); N.Y. Dep't of Taxation, supra note 144, at 2 (statingthat sales tax is "based on the market value of the convertiblevirtual currency at the time of the transaction, converted to U.S.dollars"); Wis. Dep't of Rev., supra note 144 (stating thatthe sales tax basis is the fair market value on the day of the sale);Cal. Bd. of Equalization, supra note 159 (stating that the advertisedprice is the basis for sales tax); Wash. Dep't of Rev., supra note159 (stating that the tax basis is the dollar value that the retailerwould accept).

(303.) See generally Ky. Dep't of Rev., supra note 144, at 1(stating that the fair market value of bitcoin at the time of thetransaction is the basis); mich. Dep't of Treas., supra note 144,at 2 (stating that a "taxpayer accepting virtual currency must alsomaintain documentation demonstrating the value of the virtual currencyon the day and at the exact time of the transaction"); n.J.Dep't of Taxation, supra note 144 (stating that retailers mustrecord the dollar value amount of virtual currency at the time of thetransaction); N.Y. Dep't of Taxation, supra note 144, at 2 (statingthat sales tax is "based on the market value of the convertiblevirtual currency at the time of the transaction, converted to U.S.dollars"); Wis. Dep' t of Rev., supra note 144 (stating thatthe sales tax basis is the fair market value on the day of the sale);Cal. Bd. of equalization, supra note 159 (stating that the advertisedprice is the basis for sales tax); Wash. Dep't of Rev., supra note159 (stating that the tax basis is the dollar value that the retailerwould accept); Bajpai, supra note 40 (establishing that Bitcoin is themost popular form of virtual currency).

(304.) Cal. Bd. of Equalization, supra note 159 (stating that theadvertised price is the basis for sales tax); Wash. Dep't of Rev.,supra note 159 (stating that the tax basis is the dollar value that theretailer would accept).

(305.) See generally The Birth of Silicon Valley, NPR (Apr. 4,2012, 3:57 AM), http://www.npr.org/2012/03/26/149404846/the-birth-of-silicon-val ley(establishing California's reputation for innovation).

(306.) See generally David Kroll, 7 Reasons Why It's FinallyTime to Live in Research Triangle Park. Forbes (Feb. 4, 2014, 9:00 AM),http://www.forbes.com/sites/davidkroll/2014/02/04/7-reasons-its-finally-time-to-live-in-research-triangle-park/#7a35c0821410 (establishing N.C.'s emphasis on technology inResearch Triangle Park).

(307.) I.R.C. [section] 988(e) (2015).

(308.) I.R.C. [section] 987; Antonikova, supra note 126, at 451.1

(309.) See I.R.S. Notice, supra note 22 (stating that virtualcurrency will be treated as property for federal tax purposes).

Kelly J. Winstead, I would like to thank Lori Mahmoud, [CatherineBosken, Vinita Tandon, and Ariana Johnson for their guidance during theediting process. Further, I would like to thank my parents, sister,grandparents, and friends for their love and support.

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The North Carolina state tax treatment of virtual currency: an unanswered question. (2024)

FAQs

What is the virtual currency question on a tax return? ›

In fact, one of the first questions on Form 1040, which is used by most people to file their tax returns, asks the following: “At any time during 2023, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest ...

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What is the virtual currency question on Turbotax? ›

The Form 1040 now asks, “At any time during 2023, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” The IRS added this question to remove any doubt about whether cryptocurrency activity is taxable.

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How is virtual currency treated for tax purposes? ›

For U.S. tax purposes, digital assets are considered property, not currency. A digital asset is stored electronically and can be bought, sold, owned, transferred or traded.

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Do I pay state taxes on cryptocurrency? ›

Capital gains taxes are applied at both the federal and state (where applicable) level. They can be long-term or short-term, and how long you've held your crypto affects how much tax you'll end up owing.

How do I report virtual currency on my tax return? ›

On Form 8949 you'll report when you purchased the cryptocurrency and when you sold it, and the prices at which you did each. The purchase and sales dates are important, because the length of time you owned your cryptocurrency determines how much you're taxed on it.

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What crypto wallet does not report to the IRS? ›

Some cryptocurrency exchanges do not report user transactions to the IRS, including: Decentralized crypto exchanges (DEXs) like Uniswap and SushiSwap.

What is virtual currency and how does it work? ›

Virtual currencies are digital representations of value that can exist only electronically. Their transactions occur on online networks or the internet. Examples of virtual currencies include tokens and cryptocurrencies. Virtual currencies are a novel form of currency and, as such, are mostly unregulated.

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TurboTax calculations are 100% accurate so your taxes will be done right, guaranteed, or we'll pay you any IRS penalties.

Is TurboTax estimated refund date accurate? ›

TurboTax gives you an estimated date for receiving your refund based on a 21 day average from your date of acceptance, but it can take longer. “21 days” is not a promise from TurboTax or the IRS. Once your federal return has been accepted by the IRS, only the IRS has any control.

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Is Cash App virtual currency? ›

Cash App Investing LLC, a subsidiary of the Company, does not trade virtual currency or provide virtual currency services and the Company is not a member of FINRA or SIPC. Virtual currencies are not stocks or securities and your virtual currency holdings are not protected by the FDIC or SIPC.

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How much will I get if I put a dollar in Bitcoin? ›

Current USD to BTC exchange rate

1 USD equals 0.000016 BTC. The current value of 1 United States Dollar is -0.81% against the exchange rate to BTC in the last 24 hours. The current Bitcoin market cap is $1.27T. Create a free Kraken account to instantly convert USD to BTC today.

How to cash out crypto without paying taxes in the USA? ›

There is no way to legally avoid taxes when cashing out cryptocurrency. However, strategies like tax-loss harvesting can help you reduce your tax bill legally. Converting crypto to fiat currency is subject to capital gains tax. However, simply moving cryptocurrency from one wallet to another is considered non-taxable.

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How to avoid crypto taxes? ›

9 Ways to Legally Avoid Paying Crypto Taxes

Buy Items on BitDials.
Invest Using an IRA.
Have a Long-Term Investment Horizon.
Gift Crypto to Family Members.
Relocate to a Different Country.
Donate Crypto to Charity.
Offset Gains with Appropriate Losses.
Sell Crypto During Low-Income Periods.

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Mar 22, 2024

What state has no crypto tax? ›

However, there is no tax for simply owning cryptocurrency. What states have no crypto tax? Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income taxes (although New Hampshire and Tennessee tax interest and dividends while Washington taxes capital gains).

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How do I know if I need to pay taxes on crypto? ›

The IRS treats cryptocurrencies as property for tax purposes, which means: You pay taxes on cryptocurrency if you sell or use your crypto in a transaction, and it is worth more than it was when you purchased it. This is because you trigger capital gains or losses if its market value has changed.

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What is considered a virtual currency transaction? ›

Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange.

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What is 1040 virtual currency checkbox? ›

It asks: "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?" All taxpayers filing Form 1040, Form 1040-SR or Form 1040-NR must check one box answering either "Yes" or "No" to the virtual currency question.

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What is an example of a virtual currency? ›

Examples of virtual currencies include Bitcoin, Litecoin, and XRP. Digital currencies are stored in and transacted through designated software, applications, and networks in digital form. Virtual currencies are typically issued by private issuers and used among specific virtual communities.

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How do you explain virtual currency? ›

Virtual currency, or virtual money, is a digital currency that is largely unregulated, issued and usually controlled by its developers, and used and accepted electronically among the members of a specific virtual community.

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The North Carolina state tax treatment of virtual currency: an unanswered question. (2024)

FAQs

What is the virtual currency question on a tax return? ›

How much will I get if I put a dollar in Bitcoin? ›

References