As the Supreme Court recognized long ago in McCullough v. Maryland, 17 U.S. 316 (1819), taxing money renders it useless as money. This fact alone greatly impedes the use of any non-legal tender cryptocurrency as a medium of exchange. With respect to U.S. specie legal tender, the exchange of paper dollars for specie dollars is generally recognized as a non-taxable event, although about a dozen and a half states have yet to explicitly exempt such exchanges from local sales tax.
In part for this reason, all specie legal tender held in the Quintric program is vaulted at present in "state of the art" secure facilities in the State of Utah, which arguably has the most favorable specie legal tender laws in the nation. Likewise, all Quintric transactions pass through escrow governed by Utah law.
The purchase of goods and services using specie legal tender is uncontroversial as well, especially in light of federal black letter law on the topic. Of course, local sales taxes would apply to any such transaction, just as they would to purchases using paper dollars.
The most thorny tax issues arise with respect to either the conversion of specie legal tender to paper dollars or treating the two as legal equivalents for tax purposes under an “earn gold/pay taxes in paper” exploit. Three major developments have muddied the waters in these areas: (1) the U.S. Secretary of the Treasury’s failure to fulfill his statutory duty "to maintain the equal purchasing power of each kind of United States currency";29 (2) long-standing judicial authority for the proposition that all dollar types are legal equivalents; and (3) case law developed during the “mintage moratorium” uncritically followed during the current era of specie re-monetization. Each of these is explored in more detail below.
A. Different Dollar Standards
Notwithstanding the growing disparity in the purchasing power of the various kinds of dollars in circulation today, federal law continues to draw no legal distinction between specie and paper dollars. As the 5th Circuit recently observed, “a dollar is a dollar regardless of the physical embodiment of the currency.”30 Notably, that Court simply followed long-standing Supreme Court precedent:
A coin dollar is worth no more for the purposes of tender in payment of an ordinary debt than a note dollar. The law has not made the note a standard of value any more than coin. … The law knows no difference between them.31
This judicial treatment equating a $50 dollar gold coin with $50 in Federal Reserve notes, while perhaps consistent with the letter of the law for some purposes, is economically nonsensical in most contexts. In recognition of this, item 13 of Internal Revenue Bulletin 2010-17 identifies the following as a "frivolous" tax position:
(13) In a transaction using gold and silver coins, the value of the coins is excluded from income or the amount realized in the transaction is the face value of the coins and not their fair market value for purposes of determining taxable income.
While this position may be intended to curtail perceived abuses, as noted below it appears to rely largely upon language drawn from legal precedents articulated during the mintage moratorium in addressing certain abusive transactions but without providing guidance about how non-abusive transactions involving a specie legal tender platform might look. Indeed, in response to a 2015 Freedom of Information Act inquiry, the IRS only identified two cases handed down during the “mintage moratorium”, discussed below, and an order relying on such case law as the basis for its categorization of this position as frivolous. Even so, the anomaly created by the general government’s failure to maintain the equal purchasing power of each kind of currency, coupled with the absence of any legal distinction between them for most purposes, creates uncertainty. Accordingly, Quintric intends to support lobbying efforts for clarifying legislation as resources become available to do so.
B. Mintage Moratorium
Ever since the Coinage Act of 1965, by which President Johnson dispensed with the Constitutional silver dollar standard that had served the country’s economy for 173 years (with rare exceptions during wartime), tax courts have struggled with the tax implications of the ever widening specie/paper purchasing power gap. During the 20-year moratorium (1965 to 1985) on the mintage of U.S. specie legal tender, the courts developed the judicially-crafted rule of non-circulating and/or numismatic specie legal tender being treated as taxable “property other than money” pursuant to 26 U.S.C. § 1001(b).32 These cases involved tax years which occurred within the mintage moratorium, and specie coin was not technically “circulating,” as legal tender at that time.
Following the Liberty Coin and Gold Bullion Coin Acts of 1985, the mintage of specie legal tender resumed. Some courts have, however, continued to uncritically extend the rule developed during the moratorium into the new era of specie legal tender circulation.33 Notably, none of the cases which have embraced the “non-circulating” rationale in any way acknowledge the Supreme Court precedent, which draws into question their applicability to varying fact patterns.
C. Taxpayer Intent
One important factor in determining the tax treatment of a particular transaction in precious metals appears to be taxpayer intent. In Thorne and Wilson, Inc. v. Utah State Tax Commission, 681 P.2nd 1237 (1984), the Utah Supreme Court considered the applicability of sales tax to the purchase of precious metal coinage. Following the holding in Michigan National Bank v. Department of Treasury, 339 N.W.2d 515 (1983), the court in Thorne determined that:
[W]here Krugerrands are transferred as a medium of exchange ... the coins remain intangible personal property, not subject to tax. But where ... they are transferred as an investment commodity, they become tangible personal property within the meaning of the General Sales Tax Act.34
The Thorne court expanded on the Michigan National Bank holding applying it to both "United States and foreign coins, when they are not used as currency or a medium of exchange".35 Significantly, Thorne was handed down during the specie legal tender mintage moratorium. Even then, the court found that whether specie is used as money or as investment property is determinative of its tax treatment.
More recently, an Ohio federal district court ruled that where coins are “not used as legal tender, but instead … traded and converted based on their intrinsic or tangible metallurgical value”, such lose their monetary status. U.S. ex rel. Holbrook v. Brink's Co., 2015 WL 196424 (S.D. Ohio Jan. 15, 2015). Thus, intent becomes paramount.
Obviously, actual use of gold and silver legal tender as a currency for the purchase of goods and services would be highly supportive of characterization of government minted coin as legal tender. Consistency of purpose and use becomes of the utmost importance, just as it does with other tax areas such as electing to be treated as a cash versus accrual method taxpayer.
D. Tax Advice
When dealing with emerging tax issues, prudence dictates consultation with a qualified tax advisor. Professional ethics preclude an advisor from opining on, and would thus similarly preclude a taxpayer from relying upon, a specific tax treatment of any transaction through a general analysis in a white paper of this kind, because any such advice needs to be provided in the context of the taxpayer’s specific facts and circumstances.
Any person who submits a tax return or other specified submission based on positions that are the same as or similar to positions identified as "frivolous" may be subject to a $5,000 penalty, if the submission is not withdrawn within 30 days of receipt of an IRS notice that the position has been identified as "frivolous".36 Accordingly, proceed with caution when pushing the boundaries of established IRS positions.
Defensible tax positions with regard to using a mix of legal tender forms will not be possible from simply picking favorite sound-bites or choice phrases from various statutes, regulations and case law. A well-reasoned, well-researched, consistent approach places the taxpayer in good stead.
That said, the impracticality of dealing with value differentials is reduced greatly through the Quintric system. Token holders may find a new range of possible ways of transacting through specie legal tender that do not have some of the artificially triggered tax consequences that have existed in flipping back and forth between legal tender forms, and the anomalous opinions that grew out of numismatic transactions.