US's Main Financial Regulator Describes Virtual Currency as Commodity: The Impact

The Commodity Futures Trading Commission (CFTC), the main financial regulator in the US, has announced that virtual currency like bitcoin will now be recognized as a commodity in the US just like materials like gold and oil and are covered by the Commodity Exchange Act. The government can now collect taxes from those using it.

According to BusinessDictionary, Commodity tax can be described as a tax on profits made through trading commodities. Profits on commodity trading are taxed on a 60/40 basis. 60% percent of profits are taxed as long-term capital gains and 40% percent of profits are taxed as short-term capital gains.

The CFTC, for the first time, finds that bitcoin and other virtual currencies are properly defined as commodities, Aitan Goelman, the CFTC’s Director of Enforcement, said in a statement.

Following the announcement the regulatory authority filed and settled charges against bitcoin options trading platform Coinflip and it’s CEO Francisco Riordan due to it not registering and complying with the Commodity Exchange Act (CEA) and CFTC Regulations. Coinflip is based in San Francisco, California, and Riordan resides in San Francisco.

Aitan Goelman, the CFTC’s Director of Enforcement, commented in the press release, While there is a lot of excitement surrounding Bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives markets.

Coinflip consented to the order without admitting or denying any of its findings or conclusions.

"The cease and desist was a fair settlement," Francisco Riordan, Coinflip's Chief Executive Officer, said in response to a request for comment. He said that customer funds had been refunded in July 2014, before the CFTC made contact with the company. "There wasn't enough trade volume for the site to sustain itself," he added.

This act provides CFTC the authority to provide oversight of the trading of cryptocurrency futures and options. All the cryptocurrency trading will be now under the authority regulations. Any wrongdoing by any bitcoin trading company will lead to charges by CFTC.

This might soon attract the attention of the CFTC for other unregistered bitcoin derivatives firms in the US since the cryptocurrency will now come under the CFTC's scope.

This decision follows a 2014 classification of virtual currency by the Internal Revenue Service (IRS) that describes bitcoin as property, not currency for US federal income tax purposes.

Among other things, this means that:

- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.

- Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.

- The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

Now, after a lot of conflict, bitcoin has finally been considered as a commodity following its description as currency and property.