H.R. 5892 — Introduced in House

I 113th CONGRESS 2d Session H. R. 5892 IN THE HOUSE OF REPRESENTATIVES January 2, 2015 Mr. Stockman introduced the following bill; which was referred to the Committee on Financial Services, and in addition to the Committees on Ways and Means and Agriculture, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned A BILL To protect cryptocurrencies. 1. Short title This Act may be cited as the Online Market Protection Act of 2014. 2. Moratorium (a) Neither the Federal Government nor any State or political subdivision thereof shall impose any statutory restrictions or regulations specifically identifying and governing the creation, use, exploitation, possession or transfer of any algorithmic protocols governing the operation of any virtual, non-physical, algorithm or computer source code-based medium for exchange (collectively, cryptocurrency as defined herein) for a period beginning June 1, 2015, and extending five years after the enactment of this Act (such period, the moratorium period), except for statutes already enacted and effective prior to the date of enactment of this Act, and further suspending the enactment and effectiveness of any and all pending statutes and regulations until the end of the aforementioned moratorium period, except as otherwise provided in this section. (b) During the moratorium period, the Federal Government and all State governments and political subdivisions thereof shall not impose any further statutory restrictions or regulations affecting Smart Contract platforms such as cryptographic escrow services, multi-signature transactions, and oracles, so as to allow for the growth and facilitation of these important facets of cryptological technology. (c) Federal and State Agencies shall consider cryptocurrencies exempt commodities akin to gold and silver, rather than excluded commodities such as national fiat currencies. The Bitcoin cryptological protocol is not strictly a currency, but is a broad multifaceted protocol which allows for myriad novel applications. (d) Federal and State Agencies shall have no jurisdiction over Cryptocurrency Economy Transactions or Bitcoin Economy Transactions. The financial regulations authorizing these agencies are designed to protect users of financial instruments from fraud, manipulation, and other types of misconduct that result in real economic losses; not virtual losses solely within a cryptographic network. (e) Nothing in this Act shall prevent, impair or impede the operation of any government agency, authority or instrumentality, whether of the Federal Government or of any State or political subdivision thereof, to enforce currently existing criminal, civil or taxation statutes and regulations. 3. Definitions (a) Algorithm is defined as a procedure for solving a mathematical problem in a finite number of steps performed by a computer. (b) Algorithmic chain is a series or chain of bits of data comprising a unique string of data which is the basis for the cryptographic proof of a valid transfer or transaction of cryptocurrencies. The algorithmic chain for a cryptocurrency is commonly referred to as a blockchain. (c) The cryptographic proof for each transaction or transfer is based on one unique algorithmic chain, distinct from all previously existing algorithms and neither replicable nor reusable yet sharing with all other units at least one common source code element in the algorithmic chain (or blockchain) in the transferor’s existing Bitcoin or bitcoins. (d) Protocol refers to procedures or guidelines governing the creation, development and operation of a cryptocurrency. (e) Service is defined as the Internal Revenue Service. (f) The phrase using the Internet or other electronic, non-physical medium means by placement of material in a computer server-based file archive so that it is publicly accessible on, through, or over the Internet, using hypertext transfer protocol, file transfer protocol, or other similar protocols. (g) Cryptocurrency is a popular term encompassing code-based protocols supporting an electronic, non-physical media for the exchange of value, and for the sake of both clarity and the avoidance of confusion in the mind of the public, based on the prior use of this term by the Internal Revenue Service in its initial guidance (see Notice 2014–21, released March 26, 2014) this term is used herein. However, it is believed cryptocurrency encompasses the same protocols as those covered by terms such as digital currency, virtual currency or electronic currency. (h) Agencies is defined as the regulatory bodies of the Federal Government and the State governments or political subdivision thereof, including but not limited to the Commodity and Futures Trading Committee (CFTC), the Securities and Exchange Commission (SEC), the Board of Governors of the Federal Reserve, the Financial Crimes Enforcement Network (FinCEN), and the New York State Department of Financial Services (NYSDFS). (i) Smart Contracts are cryptographically encoded agreements, often utilizing multi-signature technology, which allow for automatic or multi-party execution and public recording of transactions or property transfers when certain predetermined parameters are met. (j) Multi-Signature Transactions are cryptographic contracts encoded in the blockchain, often involving third-party arbitrators or oracles, which are finalized when a pre-set number of involved parties sign off. In a three-party multi-signature transaction involving an arbitrator, the transaction may be finalized only when two (2) out of the three (3) parties—a buyer, a seller, and/or the arbitrator—sign off on the transaction. (k) Cryptographic Escrow Services are services that allow for fund transfers subject to the authorization of an arbitrator or other intermediary. These transactions can utilize multi-signature technology, allowing for the possibility of arbitration without requiring any actual transfer of funds through the intermediary. (l) Oracles are automated programs or algorithms acting as signatories to multi-signature transactions. Utilizing databases and information amalgamators, an oracle automatically executes its signature when predetermined threshold is met. (m) Cryptocurrency Economy Transactions or Bitcoin Economy Transactions are transactions involving financial instruments denominated in Bitcoin or another cryptocurrency underlying a transaction which is also denominated in Bitcoin or another cryptocurrency. A Bitcoin-denominated credit default swap that references a Bitcoin-denominated loan would be a Bitcoin Economy Transaction. 4. Declaration of moratorium (a) In general It is the public policy of the United States that no new statutes, regulations or advisory opinions be passed, implemented, enforced or issued governing the creation, use, possession or taxation of cryptocurrencies, the protocols governing each and the data, codes, algorithms or other calculations comprising each, until the expiration of the moratorium as provided in this Act. (b) Public interest It is further the public policy of the United States that the development and use of any medium of exchange which utilizes cryptographic proof of and for a transaction of cryptocurrency without the need for or reliance upon third-party intermediaries or verification will enhance the economic well-being of the American people and result in significant economic growth. Given the blockchain’s capacity to serve as a public ledger, software developers are creating mechanisms for smart technologies that will eliminate the need for many forms of costly intermediation ranging from third-party arbitration in legal disputes to key-exchanges in car and hotel rentals. The capacity for publicly recorded multi-signature transactions will allow for the seamless property transfers that are certifiable, public and secure without the use of an intermediary. These and other uses increase market efficiency and facilitate economic activity and growth. Moreover, these advances promote the autonomy and liberty of individuals and small businesses at the expense of needless bureaucracy. 5. Declaration of neutral tax treatment (a) In general It is the public policy of the United States that the production, possession or use of cryptocurrency, whether in trade, commerce or personal non-commercial transfers, should not be disfavored or discouraged by the Federal tax code or other Federal or State statute or regulation. (b) Tax treatment It is the public policy of the United States that the current guidance just promulgated and released by the Service in its Notice 2014–21 is advisory, subject to public comment and not in final form pending the expiration of the comment period. As such, Congress believes that the current guidance is less than optimal for the American people and economy, and directs the Service to issue or revise interim regulations consistent with the following. (c) Treatment as currency It is the public policy of the United States that virtual currencies should be treated as currency instead of property in order to foster an equitable tax treatment and prevent a tax treatment that would discourage the use of any cryptocurrency. Tax treatment of cryptocurrency as property does not account for the substantial illiquidity and highly limited acceptance and use of cryptocurrency, and substantially and unfairly discourages taxpayers engaging in a trade or business from using cryptocurrency in commerce. This circumstance is likely to discourage economic activity and stifle innovation and growth. At present, a taxpayer accepting cryptocurrency for goods or services will be taxed on the fair market value of the cryptocurrency despite the fact that exchange rates (from cryptocurrency to conventional currency) are both highly volatile and published or available only on a small number of proto-exchanges in the early stages of development, acceptance and awareness by cryptocurrency users. As a result, current tax treatment will measure income on the basis of an illiquid and likely inaccurate fair market value that exceeds the taxpayer’s true fair market value and hence income, resulting in the risk of a consistent overtaxation or overpayment that will act as a strong deterrent to or penalty for accepting cryptocurrency in payment. Such tax treatment is inconsistent with the tax treatment of secured notes for payment in trade or commerce, which recognizes a discount from the face value of the note due to the illiquid nature of the payment. (Note: See IRS Pub. 525 at 4.) (d) Revenue in trade or business; taxation upon monetizing event It is the public policy of the United States that taxpayers accepting cryptocurrency in trade or commerce should be deemed to realize actual income only when cryptocurrency is monetized through conversion or exchange into dollars or any official government currency, and that fair market value should be calculated as net proceeds from the conversion. (Note: This treatment seeks to achieve the most accurate and fair measure of actual income received, as distinguished from theoretical income in the form of cryptocurrency which, until its conversion to dollars, remains under substantial risk of diminution from illiquidity or other conversion risks or inefficiencies. This treatment is consistent with tax treatment of statutory stock options where the taxable event is not the receipt or exercise of the option, but the sale of the underlying stock for proceeds in cash. The goal here is to have income taxed when the income is actual instead of theoretical and subject to substantial if not total risk of loss through liquidity problems, exchange problems or other barriers to monetization.) Accordingly, as it is the further public policy of the United States that income on cryptocurrency received in trade or business should be defined as the net proceeds from conversion of the received cryptocurrency into dollars, the Service is hereby directed to revise or issue interim regulations consistent herewith. (e) Revenue from mining or creation of cryptocurrency It is the public policy of the United States that the Service’s guidance that taxpayers should have the fair market value of the cryptocurrency they successfully mine or produce included in gross income is inequitable, overstates actual income by overstating fair market value by not accounting for the liquidity risk or the risk that substantial effort may yield no production, and strongly and unfairly penalizes or discourages such income producing efforts and deters economic growth, activity and innovation. Accordingly, as it is the further public policy of the United States that mined produced cryptocurrency should be taxed as income only when actual a transfer and conversion of proceeds into dollars realize income, the Service is hereby directed to revise or issue interim regulations consistent herewith. 6. Severability If any provision of this title, or any amendment made by this title, or the application of that provision to any person or circumstance, is held by a court of competent jurisdiction to violate any provision of the Constitution of the United States, then the other provisions of that title, and the application of that provision to other persons and circumstances, shall not be affected.