Impact of the IRC Section 475 Mark-to-Market Election on Bitcoin Taxation

IRS Notice 2014-21 provides that virtual convertible currencies, including Bitcoins, be treated as property rather than currency, and the general tax principles applicable to property transactions apply to all related transactions. In this paper, we suggest that the ambiguity created by relying on taxpayer intent/use creates an opportunity for Bitcoin traders to approximate the benefits of foreign currency designation under IRC Section 988 by making the IRC Section 475 mark-to-market (MTM) election. We suggest that the IRC Section 475 MTM election is appropriate for bitcoin traders as it allows them to convert unrealized losses into ordinary deductions and approximate foreign currency tax accounting treatment. We also suggest electing IRC Section 475 provides only marginal benefit to bitcoin dealers by accelerating pre-existing business losses to earlier periods through the mark-to-market adjustment.