There certainly has been no shortage of news related to Facebook’s proposed cryptocurrency, Libra, over the last month or so, and these headlines come after the deluge of information that occurred following the launch of this initiative back in June. After the plan for Libra and the Libra Association went live, Congress almost instantly asked David Marcus — the head of the project — to provide testimony to both the House and the Senate. Despite the headlines and coverage these hearings and subsequent conversation generated, the months after these hearings were a quiet period for the project.
This period of relative quiet, however, has been shattered over the last few weeks.
Several high-profile members of the Libra Association, including payment processing giants such as PayPal and Stripe, as well as global credit card firms MasterCard and Visa, have publicly left the association. Despite claims to the contrary from Marcus, it is difficult to view these departures as positive or even neutral news; losing a quarter of proposed founding members of the Libra Association seems to be a reflection of the doubts and growing regulatory scrutiny associated with this initiative. As if these departures were not enough by themselves, it then came to light that several U.S. senators had penned letters to these same companies that can be characterized as strongly worded, emphasizing the possibility of increased regulatory scrutiny if membership in the Libra Association was maintained. In other words, it seems like the market and regulatory pressures are continuing to increase on current and proposed members of the Libra Association.
Whether or not this project ever goes live, or whether or not it lives up to the hype, excitement, and buzz that accompanied the initial launch is of secondary importance from an accounting perspective. In the light of the recent release of FAQs and a revenue ruling from the IRS that clarified some open items while presenting some new ones, this is a good time to reflect on how Libra continues to influence the broader cryptoasset and virtual currency conversation.
Let’s take a look at three ways that Libra, despite its recent headwinds, continues to drive the crypto conversation forward.
1. Stablecoins are now a codified part of the Tax Code. In the very first question that was responded to by the IRS, it was stated that the virtual currency category — building on the initial 2014 guidance — would now include virtual currencies that are redeemable for other assets. Given the rapid development of the stablecoin area, but especially the push it was given by Libra, the definitive inclusion of these assets under the virtual currency umbrella was a welcome update.
2. Using any virtual currencies as payment for goods or services, or as compensation, remains unchanged in the updated guidance. Libra, by its very nature, is being marketed and developed as a legitimate payment option and alternative to fiat currencies. Despite that, and calls by various industry associations for a de minimis exemption for full reporting and compliance, the IRS appears to be holding firm on classifying all virtual currencies as property. In other words, if the over 2 billion users of Facebook adopt Libra for payment — as it is intended — this will result in a vast amount of more compliance and paperwork due to its classification as property.
3. The responsibility of reporting and documenting basis remains with the profession. Despite the high-profile court case versus Coinbase, there is still — to date — no mandate for crypto-exchanges to report 1099 documents to all users. This lack of clarity is compounded when it comes to decentralized exchanges, which have no management or leadership that can communicate or negotiate with the IRS or other taxation authorities. The takeaway is that practitioners should still advise clients to collect and hold onto as much documentation and verify as much information as possible. Again, with the potential for Libra to be used by billions of individuals, and tens of millions of those users in the U.S., the implications could be wide ranging.
These are just a few of the takeaways that can be extracted from the updated IRS guidance, including the glaring conflation of hard forks and airdrops, that will without a doubt continue to be debated and analyzed for months to come. Even with all of this analysis, however, it is worth noting how the mere introduction of Libra into the crypto-space can seemingly be identified as a driving force behind some of the recently provided updates and clarifications.
Going forward, and no matter what final form the Libra initiative takes, it seems clear that practitioners should keep an eye on both the crypto space and Libra.