The Bitcoin "Treasure"

   The Nuestra Senora de Atocha was a Spanish treasure ship that sank in a hurricane in 1622 off the Florida Keys. The ship was filled with copper, silver, gold and gems from the Spanish ports at Cartagena and Porto Bello in New Granada and Havana. The owner of the ship was of course King Philip IV of Spain. Most all of the 110 crew and passengers were lost. It is said that the gold and silver was so grand that it took two months to load aboard ship. The gold and silver alone weighed 40 tons. The Spanish king sent salvage ships to recover its treasure. Soon a second hurricane scattered the loot even further. The Spanish were able to recover about half of the ship’s contents. That left about half a billion dollars’ worth in today’s value on the ocean floor ready to be scooped up by anyone with the good fortune to find it. Now what does any of this have to do with bitcoin? Read on. Treasure hunters from all over the world used Spanish records in Madrid to try to locate the ships contents. One such treasure hunter was Mel Fisher. Fisher set out with other investors to comb the sea floor. It took them 16 ½ years and at least two bankruptcies before finding the mother lode in July, 1985.The value for his find was estimated at $403 million at the time. For lawyers who may be somewhat bored with the practice let it be known that the entire stash was not and has still not been found. Fisher’s discovery in the Florida Keys was in just 55 feet of clear ocean water. Recreational divers, like myself, are licensed to dive with ordinary equipment to 100 feet. Fisher’s find was disputed by the state of Florida and it took litigation through the Supreme Court before his rights in the treasure were settled. The question for Fisher was where to store the loot. And that’s where I got to meet him. Mel Fisher’s Treasure Museum in the early 1990s was and still is in Key West, Florida. In the early days silver and gold bars were stacked along the walls of what looked like a one-time warehouse. Trinkets and souvenirs from the Atocha were sold in a makeshift gift shop in the building. I’ll admit to having a fascination at the time with both diving and treasure hunting. And my interest brought me to the museum. While in line to purchase a trinket, I struck up a conversation with the cashier. By that time I had been an IRS agent and an IRS lawyer in my career. The cashier was complaining about the taxability of the gold, silver and emeralds she had received as she had been part of the partnership aboard the ship. Fisher ran his operation much like 16th century Pirates. No one was paid until the loot was found and then by a set proportion of the booty based upon their duties aboard the ship. The cashier had received a 1099 from the partnership indicating a huge taxable income based on the things she had received. She asked a simple question “where do I get the money to pay these taxes?” In short order I gave her a discussion of code section 61 that taxes income from “whatever source derived” including from the bottom of the ocean as treasure. This did not make her happy. She realized she would be forced to convert her precious metals to cash to pay the taxes. I offhandedly remarked how much I admired Mel Fisher’s determination and that I would love to have met him. To my surprise she said “you can go around back to his office I think he is in there today”. I took her up on the offer and got to meet the big man himself. In the course of conversation Mel with a gold doubloon hanging from his chest with what looked like a golden length of rope said we could have used an ex-IRS agent who could dive on board. Naturally, I immediately volunteered to be that person. No, I never did get to go diving with Mel Fisher. I went back to Hackensack and had a career in tax law instead. But Mel and I talked about the problem with paying taxes with things that are not currency. After all the gold and silver and gems were property. Now enter the problem with bitcoin. In 2014, the Internal Revenue Service announced that crypto currency was actually “property” and therefore subject to all the rules with regard to property transactions. Now when you take a $20 bill out of your pocket and buy a latte or two with it, you don’t receive a 1099 because of the currency transaction. But if you use a share of stock instead to purchase that coffee the difference between your cost and the sales price becomes a taxable transaction. By ruling that bitcoin was in fact property and not currency many traders who made a fortune in 2017 based on the boom and their trades of bitcoin in that year are now waking up finding huge tax bills for their transactions. To make matters worse the value of the bitcoin has steadily decreased in 2018. So the traders lack the funds to pay the taxes. A recent New York Times article talked about a conference where just the tax issues of bitcoin transactions were discussed. Apparently a number of the traders will try their luck and hope that the IRS simply does not detect their taxable trades. I recently attended a tax seminar where IRS special agents mentioned the fact that the IRS criminal division will be looking at just this type of problem. So bitcoin traders should be aware that IRS is on to them and that they have already used summons to acquire the names and other information on thousands of people who have been involved in the bitcoin boom and bust. Those who become disgusted with the situation may want to take scuba lessons and head to the Florida Keys. Diving is a lot less stressful than sitting in front of a computer watching flickering numbers on the screen waiting for that IRS agent at your door. Any of my legal colleagues who dive and who may be so inclined to look for another source of income should give me a call or leave a comment here as my interest in treasure hunting remains.