I’ve been offered all sorts of things as a fee for my services. My favorite offer was of a house in Mexico. I turned it down, telling the potential client I didn’t have time to visit Mexico, much less own a house there.
Accepting property as a fee is trouble brewing. You have to declare a value for transaction for tax purposes. The value of most things is what you can sell it for. I’d rather practice law than become a broker in miscellaneous items.
So what about Bitcoin? Can a lawyer accept payment for legal fees in Bitcoin?
Our office was consulted on that question last week, and the answer surprised me. Bitcoin, for those of you who don’t pay attention to such things, is a medium of exchange existing only in digital form. If you are defending folks charged with serious felonies, your fees are often in excess of $10,000. If paid in cash, you are required to get identifying information from your client, and submit an Internal Revenue Service Form 8300 to the federal government. Failure to do so is a crime.
The form is part of the government’s effort to crackdown on money laundering. Ill-gotten gains are subject to forfeiture in criminal cases, and to being clawed back out of the hands possessing them in civil proceedings.
Tracing the provenance of funds is supposed to make it more difficult for the nefarious to succeed. As a general matter, the government wants a paper trail for large sums of cash. A cashier’s check requires the bank to fill out a form; a personal check is drawn from an individual’s account; money orders must be purchased from vendors with reporting requirements. Cash, on the other hand, is silent.
What to do about a client who pays with $10,000 or more in Bitcoin?, we were asked. I assumed that the answer would be to report it on a Form 8300, so I pulled out a form and read the instructions. Nothing about Bitcoin there. I then went to the IRS webpage, and learned that the taxman doesn’t consider Bitcoin to be currency or cash. The feds regard it as property.
That is counterintuitive. Bitcoin has no value other than as a medium of exchange. You can live in a house or sell the house for cash; you can drive a car or sell it for cash; all you can do with Bitcoin is use it to purchase something else. Bitcoin functions like a currency., and like a currency, it has an exchange value.
At the time of this writing, one Bitcoin was worth about $606, according to www.coindesk.com. Bitcoin lives in a dark world outside the law, unregulated, murky, indeed, even suspicious. It is the very sort of medium of exchange one would most expect the IRS to be interested in.
As near as I can tell, however, there is no requirement to report the receipt of Bitcoin, regardless of how large the sum. I didn’t trust my research, so I called a senior lawyer in the Justice Department who represents the taxman. What about Form 8300 and reporting requirements for Bitcoin?
A day or so later, I had my answer: There is no reporting requirement. I am stunned by that answer.
A lawyer receiving Bitcoin is still required to declare a value for tax purposes, and selling large sums of Bitcoin is not easy. Banks don’t want to deal with them; they are messy, suspicious and the sort of thing likely to draw questions from Uncle Sam.
But I am also intrigued and more than a little relieved by the news that this “property” exists outside the law. There still is a way to exchange things of value without having to genuflect before the government’s ever-watchful eye. Privacy has a currency – it’s called Bitcoin. Something tells me the taxman won’t rest for long. Expect new regulations, and soon. But until those regulations come, you are free to accept all the Bitcoin you want.
Remember that name. Whether he actually exists or not is an open question. But there is little doubt Nakamoto’s 2008 paper describing the creation of Bitcoin was one of the most revolutionary acts of the earIy 21st century.
What is Bitcoin?
The governments of the world can’t tell you. They can’t agree. Some define it as property. Some call it currency. Sometimes, it is regarded as both currency and property.
There are millions of Bitcoin in the world, but you’ll never see one. Bitcoin, you see, are digital events, pulses of electricity harnessed and displayed as units on a computer screen.
But for all their intangibility, Bitcoin have the potential to change the way services are purchased, wages are paid, and commerce is conducted.
It works something like this. Two individuals communicate directly with one another via a computer network in what computer-literate folks call a peer-to-peer exchange. Each has a code. They exchange a good or service and the transaction’s value is paid for in Bitcoin. The transaction is electronically recorded.
The next time one of the parties engages in an exchange and uses Bitcoin, they use their code to link to another party, who, in turn, uses his or her code to complete the link. That transaction, too, is recorded as part of a chain of communications.
A block chain defining these unique exchanges is encoded and encrypted on line. These chains are unique to each unit, and are transparent, open to viewing by anyone with the inclination and skill to do so.
What no one ever sees is the identity of the parties who are trucking, bartering and trading in Bitcoin.
In simplified terms, this is Bitcoin, a medium of exchange not created by the government, and, in the United States, largely unregulated. Individuals are free to use Bitcoin as a means of purchasing goods and services, so long as they are able to find a seller willing to accept it.
So is it money?
That is a question easier to pose than to answer.
Bitcoin is not legal tender — a medium of exchange authorized by, and created by, the federal government. The Constitution gives to the federal government the power to mint money; legal tender is always valid to meet a financial obligation. If you owe a creditor $10, he or she must accept legal tender to satisfy the debt. The acceptance of Bitcon, on the other hand, is optional.
Bitcoin as property has a value. It can be purchased. At the close of business on Thursday, one Bitcoin was selling for $596, according to coindesk.com.
Bitcoin, and other virtual currencies, pose a challenge to the government. A secret, unregulated quasi-currency can be used to do all sorts things. One fear is that it can used as a means of money laundering.
Most of us don’t give a second thought to the provenance of the dollars we spend. But state and federal law are strict when it comes to the proceeds of unlawful gain: assets can be forfeited to the government if they are used to commit of facilitate a crime, or if they have their origin in unlawful activity. Money can be “clawed back” in civil and criminal proceedings from the hands of those who knew, or should have known, that the funds were “dirty.”
Lawmen monitor the flow of cash to deter the funding of terrorism and to frustrate those intent on making a living by illegal means.
Lawyers, in particular criminal defense lawyers, walk a tightrope. Unless you are a public defender, you are working for fees. A smart lawyer gets the fee up front.
Suppose your client wants to pay you in cash? What then?
If the sum is less than $10,000, it’s not big deal. But if a client pays $10,000 or more in cash, things get awkward. The law requires the lawyer to review a form of the client’s identification and to report the transaction, and the client’s identity, on a federal form. Failure to do so is a felony.
Can clients avoid these reporting requirements by paying in Bitcoin?
I thought the answer was no. That would make sense, right? If Bitcoin can operate as currency, and it can be used to pay for services, then a client paying $50,000 worth of Bitcoin surely can’t be permitted to do so privately?
Yet, the Internal Revenue Service requires only the reporting of cash. The form is silent about Bitcoin. A separate IRS publication calls Bitcoin property. You needn’t report the identity of a person who gives you property, although you must report the value of the property as income.
This conclusion made no sense to me. None. I didn’t trust my reasoning. How could the law spend so much time trying to deter money laundering but ignore this obvious way to step outside its boundaries?
So I called a federal prosecutor who represents the IRS in criminal prosecutions. He, too, assumed I was wrong.
Two days later, he called back: Bitcoin payments needn’t be reported, he told me.
I was surprised by the answer.
All week long I’ve mulled this strange result. At week’s end, I think I’m more surprised now that I had assumed that all we do is under the legitimate surveillance of the government. It’s reassuring, candidly, that there are ways to exchange goods and services that aren’t on the government’s lawful radar. (I’ll leave it the likes of Edward Snowden to tell me the government is watching Bitcoin, too.)
Are Bitcoin, the dark web and virtual reality the new state of nature?
For the past several centuries, Western political philosophy has had a name for an imagined universe without law, customs or even civil society — the state of nature. This literary device has placed a prominent role in the development of our political ideas and ideals.
We talk of natural rights, of limited power, of retained freedoms largely because we can imagine a world before, and without, government.
Bitcoin suggests that, at least for the time being, the world is more real than I had imagined. It is a world that may, or may not, contain the likes of such shadowy figures as Satoshi Nakamoto.