In June 2019, Facebook and a consortium of 28 founding members including Visa, Mastercard, PayPal, Uber Technologies, Inc., and eBay announced the launch in 2020 of a new digital currency called Libra, promoted as “a simple global currency and financial infrastructure that empowers billions of people.” In a White Paper introducing Libra, the consortium promises accessibility to the 1.7 billion adults globally who remain outside the financial system but who have access to mobile phones and the internet and pledges trustworthiness and support for “collaborating and innovating with the financial sector, including regulators.” Yet Libra’s global reach and potential for misuse has alarmed U.S. regulators and central bankers worldwide. At a July 11, 2019 Senate Banking Committee hearing, Federal Reserve Chair Jerome Powell expressed concern that no single regulator currently has authority to oversee Libra, stating that “Libra raises a lot of serious concerns, . . . [including] privacy, money laundering, consumer protection, [and] financial stability.” Treasury Secretary Steven Mnuchin, in a White House press briefing on July 15, 2019, acknowledged the great interest in Libra and other cryptocurrencies but voiced Treasury’s serious concern “regarding the growing misuse of virtual currencies by money launderers, terrorist financiers, and other bad players.” Concerns have also been articulated by private citizens. In an Opinion piece published by the Financial Times on June 21, 2019, Facebook co-founder Chris Hughes warned that Libra will permit companies that will put their private interests ahead of public ones to exercise monetary control and will “disrupt and weaken nation states by enabling people to move out of unstable local currencies and into a currency denominated in dollars and euros and managed by corporations.”

While Libra’s potential scope has increased the call for regulation, because they facilitate rapid, secure and often anonymous financial transactions, digital currencies have long been attractive for criminals involved in a wide range of illicit activities. In recent years, the digital currency Bitcoin has facilitated criminal activity ranging from funding the Russian hacking of the 2016 U.S. presidential election to purchasing child pornography and selling opioids online. Speculators have also lost billions of dollars in schemes to market allegedly fraudulent cryptocurrencies such as OneCoin and My Big Coin.

The lack of central financial authority oversight also means that digital currencies can be used to facilitate rampant tax evasion and, recently, the IRS and Tax Division of the Department of Justice pledged to focus on digital currency-related offenses. Thus, at the New York University Tax Controversy Forum in June, Principal Deputy Assistant Attorney General Richard Zuckerman announced that the Justice Department already has pending cryptocurrency-related criminal cases and will continue to target such offenses.

And, in a highly publicized move, on July 26, the IRS announced that it is sending 10,000 letters to taxpayers who potentially failed to pay taxes on digital currency transactions or who may have reported those transactions improperly. The announcement states that the taxpayers were identified through ongoing IRS compliance efforts, which included a “John Doe” summons that the IRS served on the virtual currency exchange Coinbase, Inc., that called for the production of records identifying taxpayers who utilized the exchange. The IRS announcement identified three variations of the letter. The most severe (Letter 6173) states that the IRS has information that the taxpayer may not have met tax filing and reporting requirements for virtual currency transactions and requires the taxpayer to file returns, amend incorrect returns, or submit a written explanation under penalty of perjury explaining why previously filed returns are correct. Taxpayers receiving this letter must respond within 30 days or risk an audit. A second letter (Letter 6174) states that the recipient may not have properly reported digital currency transactions, while a third (Letter 6174-A) suggests that the recipient may not know reporting requirements for virtual currency transactions. Both of these “softer” letters advise the taxpayer to consider filing amended or delinquent returns, and they both seek to educate taxpayers about their obligations arising from digital currency transactions, but note that failure to accurately report may result in civil or criminal enforcement activity. The IRS’s announcement also warns that the “IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.”

Current IRS guidance treats digital currency as property (rather than currency), with capital gains and losses realized every time it is used in a transaction. The IRS recently acknowledged, however, that since its most recent guidance was issued in 2014, "virtual currency as a medium of exchange and investment has continued to develop," necessitating clarity on "basic issues" such as methods for calculating cost basis and cost basis assignment and tax treatment of “forks” (splits that create both an old and new version of a digital currency). In a letter to Congress dated May 16, 2019, IRS Commissioner Charles P. Rettig confirmed that the IRS intends to publish additional guidance for taxpayers relating to virtual transactions. It remains to be seen what guidance will be forthcoming, but in the meantime, in order to comply with their tax obligations, users must track the value of digital currencies from the time of acquisition to the time they are spent, which is a taxable event.

The tax compliance issues surrounding digital currencies mean that while the Libra consortium is promising that the new digital currency will be accessible to anyone with internet access and will be easy to use to pay for everything from rides provided by Uber and Lyft, to merchandise sold on eBay and goods and services provided by other companies expected to join the consortium, unless the IRS shifts course, Libra users who wish to remain tax-compliant will have to undertake complicated record-keeping and tax reporting. Even if Libra follows through on its intention to provide tools to track transactions and generate reports for users, the IRS’s treatment of digital currencies is likely to be a substantial obstacle to the widespread adoption of Libra and other digital currencies by law-abiding individuals. (See Testimony of David Marcus, Libra Digital Currency Co-Creator & Calibra Head, Senate Banking Committee, July 16, 2019 at 1:45:17.)