Bitcoin is now legal tender in El Salvador

And a cross post from Reddit:

There are potentially huge US tax and reporting implications if El Salvador makes Bitcoin legal tender

On its face, it’s obviously great for Bitcoin if El Salvador adopts it as its legal tender. There are, however, nuances in the internal revenue code that make this news much bigger than most realize.

Most know that when trading foreign currencies gains must be reported and are taxed. But Section 988(e) carves out a de minimis exception for “personal transactions” where the gains do not exceed $200.

This is intended to allow travelers to transact in foreign currencies without all of the burdensome reporting requirements.

So far, Bitcoin has not qualified for this exception. Under IRS Notice 2014-21, the IRS opines that Bitcoin is “property” and not a “currency” because “ it does not have legal tender status in any jurisdiction .” There is a good argument, though, that once Bitcoin is “legal tender” in El Salvador, it will qualify for US individuals as a “nonfunctional currency” (under Section 988), allowing individuals to forgo reporting gains on small, daily transactions—“personal transactions.”

In other words ( tldr ), if Bitcoin is legal tender in El Salvador, US citizens could possibly freely transact in Bitcoin, as a “nonfunctional currency,” without a need to report gains of less than $200.

That’s potentially huge news for retail US citizens, but there is also huge news for US Bitcoin businesses.

Most US businesses use the US dollar as their unit of account for bookkeeping and reporting. However, there are cases where businesses operating primarily in foreign jurisdictions use a foreign currency—the unit of account does not have to be USD. The unit of account used by the business is the “ functional currency ” of the business and, perhaps, even an individual (see Sec. 985 IRC). If a business’s “functional currency” is a foreign currency, it does not have to bother with gains/losses related to USD fluctuations.

Again, under Notice 2014-21, Bitcoin cannot qualify as a functional currency. And, again, this could change if El Salvador adopts Bitcoin as legal tender.

Final tldr If Bitcoin becomes legal tender in El Salvador, IRS Notice 2014-21 may become partially null, relieving US individuals and business of huge tax and reporting burdens, paving the way for Bitcoin to legally and easily be used as a currency in the US.

Disclaimer: I am not a tax lawyer. The discussion and analysis on this should be much more detailed before financial decisions are made. I’ve written this to be used as a starting point for discussion with a tax lawyer.

Edit : Many have pointed out that Japan recognized Bitcoin as “legal tender” in 2017. They did not. A lot of misinformed authors incorrectly wrote that, but there is a distinction between Japan’s legal recognition of Bitcoin as a form of payment and what the Code/Regs/precedent considers “legal tender.” I think (and hope) that El Salvador will truly recognize Bitcoin as legal tender.

16 Likes

He cannot distinguish between Costa Rica and El Salvador

4 Likes

Apparently in the wrong country :smiley:

6 Likes

I want so much money that I can’t tell where I own houses. Safe to the moon!

10 Likes

How do you buy a house in the wrong country? :joy:

3 Likes

That is the true sign of wealth. Forget about silly yachts.

3 Likes

Yeah I think he got into btc around the dollar mark. Can’t recall where I saw him say that but he heckled Saylor recently that a billion is chump change.

2 Likes

Bitcoin maximalists: could it be that this term has something to do with Max Keiser (I don’t know a Max Kieser)? In this video he is saying “we’re not selling” (Bitcoin I assume), but now he is buying a house in a random country?

2 Likes

It is possible that he took out a loan with bitcoin as collateral. He also has other assets - gold and silver. He probably also has other crypto … so all up no reason to think he actually did sell any … that all said, selling “a little” of his mega-stash to buy a house … maybe he just wouldn’t count that as “real selling”

3 Likes

He knows us!

But I find the story of buying a house in the wrong country daft. I am guessing the whole thing (buying it) was nonsense.

8 Likes

I know, I was just being a spelling nazi :wink:

4 Likes

:joy: I was surprised that you would not know him.
Well Keiser it is :stuck_out_tongue_closed_eyes:

3 Likes

That house he says he bought in el Salvidor is apparently in costa rica https://www.point2homes.com/CR/Home-For-Sale/Puntarenas/Garabito/Playa-Hermosa/Valle-Perdido/Modern-Oceanview-Costa-Rica-Home-in-Gated-Community/102074297.html

6 Likes

fun fact : Costa Rica is one of the very few countries without any army…

11 Likes

Its a lovely country with lovely people too. :sunglasses:

4 Likes

it sure is, pura vida!

6 Likes

Also spent that budget on a rain forest and now have that. Seems wise to me

13 Likes

Bitcoin becomes legal tender in #ElSalvador:

Twitter Translation:
With 62 votes, the legislative plenary session approves the #LeyBitcoin with which El Salvador adopts the #Bitcoin as legal currency.

#LaNuevaAsamblea keep making history!

20 Likes

I’ve been wondering for a long time which country would do this first.
Also, how well financially a country will do if they held bitcoin reserves.

Going to watch El Salvador with interest.

8 Likes

My understanding is that now because bitcoin is legal tender in at least 1 country, per US law if your transaction using bitcoin involved a gain under $200 it does not need to be reported.

This opens the door to using bitcoin as payment without horrendous accounting and tax obligations.

Will it actually go this way?

Edit: apparently not much to be excited about yet in that regard.

4 Likes