In an age where the concept of “currency” has become a somewhat nebulous concept for consumers and regulators alike, Facebook just added to the complexity of the landscape by introducing a new type of currency to the market—Libra. On June 19th, Facebook announced its vision for a new cryptocurrency by publishing a White Paper to answer questions about what the currency is, what the currency is not, and how the currency plans to launch in a way different than other, more well-known cryptocurrencies, like Bitcoin and Ethereum.
According to the White Paper, the mission of Libra is to form an accessible global currency, so that no matter who someone is, where someone lives, or how much someone makes, individuals can access financial services. As such, Libra “is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets — the Libra Reserve — and supported by a competitive network of exchanges buying and selling Libra.” To that end, there are three operative components that will facilitate the launch, growth, and stabilization of the Libra:
- Building Libra on a secure, scalable, and reliable blockchain;
- Backing Libra by a reserve of assets to provide the cryptocurrency with intrinsic value;
- Governing Libra by an independent Libra Association.
So, with a reserve of assets and an independent governing body, some may wonder, is Libra even a cryptocurrency? The resounding answer as proffered in the White Paper, is yes. Notably, the White Paper explains that although the inherent differences between Libra and many existing cryptocurrencies are Libra’s intrinsic value and the independent governing body, the inherent similarities include the ability to transfer money quickly, the security of being based in cryptography, and the freedom for individuals to transmit funds across sovereign borders.
As of now, Libra is a vision. The White Paper introduced the world to this currency concept and foreshadowed Libra Blockchain’s upcoming open-sourcing initiative. However, the target launch of the actual currency isn’t expected until the first half of 2020.
We have seen how regulators and taxing authorities have responded to other cryptocurrencies, so what do the same governing bodies think of Libra? So far, the regulatory response has been tempered with curiosity and strong skepticism. On July 17, 2019, the Committee on Financial Services held a hearing in Congress called “Examining Facebook’s Proposed Cryptocurrency and Its Impact on Consumers, Investors, and the American Financial System.” In the words of Rep. Patrick McHenry from his opening statement at the Hearing, “we’re here to go beyond the headlines…Washington must go beyond the hype to ensure that we are not the place where innovation goes to die.”
What will regulators do next? While no one knows for sure, we may expect to see some legislation come down in the near term. In fact, a discussion draftof a new bill, “Keep Big Tech Out of Finance Act,” which has yet to be formally introduced, has appeared linked on the U.S. House Committee on Financial Services webpage. As of this article’s publication, the stated purposed in the draft bill is “to prohibit large platform utilities from being a financial institution or being affiliated with a person that is a financial institution, and for other purposes.” We will keep a close eye on the regulatory developments, and we can be all but certain developments will abound.
What can we expect tax consequences to look like for Libra? The IRS has not issued any new guidance addressing the taxation of Libra specifically, and in fact, has not issued any additional guidance regarding cryptocurrency since 2014. Under Notice 2014-21, virtual currency is taxed as property, and since Libra is a form of virtual currency, the same property taxation rules would likely apply. However, the Congressional Blockchain Caucus has called upon the IRS to issue additional guidance regarding the taxation of virtual currencies. In April 2019, the Caucus submitted a letter to Commissioner Rettig requesting “clarity on several basic unanswered questions regarding federal taxation of these emerging exchanges of value.” The Commissioner responded with a letter in May 2019 agreeing that “taxpayers deserve clarity” and to that end, the IRS intends “to publish guidance addressing these and other issues soon.” We, alongside other taxpayers and legislators, look forward to the additional guidance from the IRS and will provide updates on how this guidance applies specifically to Libra when it gets released.
Should you have any questions regarding cryptocurrency, or any other complex tax issue please contact Steven Miller, National Director of Tax.