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26 May 20232 minute read

IRS confirms that cryptocurrency is still not legal tender

Last month, the IRS issued Notice 2023-34, which confirmed the IRS’s position set out in Notice 2014-21 that convertible virtual currency (ie, cryptocurrency) does not have legal tender status in any jurisdiction.

Under Notice 2014-21, the IRS set out its view that cryptocurrency is treated as property for federal tax purposes and that general tax principles applicable to property transactions (not currency transactions) apply to transactions using cryptocurrency. The IRS noted in Notice 2014-21 that cryptocurrency does not have legal tender status in any jurisdiction, which seemed to imply that the IRS’s treatment of cryptocurrency as property might change were one or more countries to adopt cryptocurrency as legal tender. In fact, in 2021, seven years after Notice 2014-21 was released, El Salvador announced that it would begin accepting Bitcoin as legal tender.

Notice 2023-34 clarifies that the IRS’s view on cryptocurrency as legal tender has not changed and modifies the background section of Notice 2014-21 to say that "[i]n specific situations, virtual currency may fulfill one or more of the functions of 'real' currency – that is, the coin and paper money of the United States or any other country designated as legal tender, circulating, and customarily used and accepted as a medium of exchange in the issuing country – but the use of virtual currency to perform 'real' currency functions is limited."

In other words, although cryptocurrency may perform one or more functions of currency in some cases, the IRS has confirmed that it will continue to take the position that cryptocurrency is property and not legal tender. The IRS did not give any indication as to what circumstances would lead it to conclude that cryptocurrency had in fact become legal tender.

Taxpayers remain hopeful that these nuances will be addressed and clarified with additional IRS guidance.