Online Market Protection Act of 2014

Summary: Online Market Protection Act of 2014 - Prohibits, for a five-year moratorium period beginning June 1, 2015, federal, state, and local governments from imposing 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 (cryptocurrency).  Defines cryptocurrency as a popular term encompassing code-based protocols supporting an electronic, non-physical medium for the exchange of value. Prohibits all such governmental entities, during the moratorium period, from imposing further statutory restrictions or regulations affecting Smart Contract platforms such as cryptographic escrow services, multi-signature transactions, and oracles in order to allow for the growth and facilitation of these facets of cryptological technology. Requires federal and state agencies to consider cryptocurrencies &quot;exempt commodities&quot; akin to gold and silver, rather than &quot;excluded commodities&quot; such as national fiat currencies. Declares that the Bitcoin cryptological protocol is not strictly a currency, but rather a broad multifaceted protocol which allows for myriad novel applications.  Denies federal and state agencies jurisdiction over Cryptocurrency Economy Transactions or Bitcoin Economy Transactions. States it is the public policy of the United States that:   until the expiration of the five-year moratorium no new statutes, regulations, or advisory opinions be passed, implemented, enforced, or issued governing the creation, use, possession or taxation of cryptocurrencies, including governing protocols, data, codes, algorithms, or other calculations;  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; production, possession or use of cryptocurrency, whether in trade, commerce, or personal non-commercial transfers, should not be disfavored or discouraged by either the federal tax code or other governmental statute or regulation; and the current guidance released by the Internal Revenue Service (IRS) in its Notice 2014-21 is advisory, subject to public comment, and not in final form pending the expiration of the comment period, and is less than optimal for the American people and economy.    Directs the IRS to issue or revise interim regulations consistent with U.S. public policy 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 cryptocurrency; 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; and mined or produced cryptocurrency should be taxed as income only when actual income is realized by a transfer and conversion of proceeds into dollars.  

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Online Market Protection Act of 
2014''.

SEC. 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.

SEC. 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.

SEC. 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.

SEC. 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.

SEC. 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.