The stance of the United States Internal Revenue Service on bitcoin has always been blurred. They have considered digital currency, for all intents and purposes, nothing more than pieces of digital property.
But a recent event goes one step further to muddy the government's stance on bitcoin.
A Missouri man was arrested and prosecuted, and ultimately pleaded guilty to charges of exchanging bitcoin for cash illegally.
Jason R. Klein, a 37-year-old, is awaiting his sentence after pleading guilty to charges of operating a bitcoin exchange illegally.
What's more, the entrepreneur traded amounts of the digital currency with cold hard cash while effecting a 10 percent commission on all exchanges.
According to the United States Department of Justice, the IRS brought in the man on charges of operating an unlicensed bitcoin exchange.
Although precedent was set by the case a man who pleaded guilty to money laundering using the digital currency MX, the case of this 37-year-old entrepreneur still strikes many as unique.
Localbitcoins.comCourt documents reveal that Klein carried out his illegal bitcoin trade on a website called localbitcoins.com. This is apparently where IRS agents stumbled on his illegal bitcoin operation after coming across an ad that offered to sell them bitcoins for cash.
Within the ad were directions to a physical location where interested customers could purchase bitcoin amounts with physical currency. On the website, Klein operated under the onscreen moniker "jrklein," as the IRS agents soon discovered.
Armed with this information, the undercover IRS agents reached out to Klein posing as interested customers, and arranged to meet at the specified location.
The court documents say that the defendant met with the agents a total of five times, during which cash amounts of $1,000, $2,000, $7,640, $15,000 and $3,600 were exchanged for 4.095 BTC, 6.4 BTC, 24 BTC, 58 BTC and 5 BTC respectively. After gathering enough evidence, the undercover agents finally arrested Klein although there was no mention of the money whatsoever.
Plea Agreement Details the TransactionsThe consequent plea agreement specifies that for the five bitcoin exchange transactions that were carried out between February 2015 and July 2016 between Klein and the undercover agents, neither Klein nor his one-time associate during one of the transactions were licensed bitcoin exchange officers.
In total, the undercover agents had paid $2,122.68 in commission fees for all the five transactions.
Klein could be sentenced to a maximum of five years in federal jail for operating a bitcoin exchange illegally. According to a BTC tax document from the IRS Virtual Currency Guidance, he was effectively trading money for the digital property.
IRS Adamant that Bitcoin is not Real MoneyThe tax document, however, recognizes that bitcoin can still be used in lieu of legal tender to purchase goods and services and can also be held for investment purposes.
However, the document says that since the digital currency could not be traded for foreign currency to gain profit for federal tax purposes, it could not be considered in the same vein as physical currency.
The editors of the document, the IRS and The Treasury Department, apparently anticipated follow-up questions after publishing the notice. At its conclusion, they provided an email address and stated that it was open to anyone in the public who felt the need to ask questions to matters that had not been addressed in the notice but were worth the consideration of governmental entities.
This is a clear-cut example of just how unprepared the U.S. government is to deal with virtual currency despite the rapidly growing interest in bitcoin and its counterparts, both as investment opportunities and as possible candidates to replace physical currency in the future.
The universal and highly decentralized nature of bitcoin and the security and privacy provided by blockchain technology could make this future a reality sooner than is anticipated.
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