The particular IRS Takes A Position On Bitcoin

Bitcoin used to be something like Schrodinger’s currency. Without regulatory observers, it could claim to be money and property at the same time.

At this point the Internal Revenue Service has opened the box, and the virtual currency’s problem is established – at least for federal government tax purposes.

The IRS recently issued guidance on how it will deal with bitcoin, and any other stateless electronic competitor. The short answer: because property, not currency. Bitcoin, together with other virtual currencies that can be exchanged regarding legal tender, will now be handled in most cases as a capital asset, and a few situations as inventory. Bitcoin holders who are not dealers is going to be subject to capital gains tax on increases in value. Bitcoin “miners, ” who unlock the currency’s algorithms, will need to report their discovers as income, just as other miners do when extracting more traditional sources.

Though this decision is not likely to cause much turbulence, it really is worth noting. Now that the INTERNAL REVENUE SERVICE has made a call, investors and bitcoin enthusiasts can move forward using a more accurate understanding of what they are (virtually) keeping. A bitcoin holder who wants to conform to the tax law, rather than evade it, now knows how to achieve this.

I think the IRS is proper in determining that bitcoin is not really money. Bitcoin, and other virtual currencies like it, is too unstable in value for it to realistically be called a form of currency. In this era of floating exchange rates, it’s true that the value of nearly all currencies adjustments from week to week or even year to year relative to any particular standard, whether it’s the dollar or a barrel of oil. But a key function of money is to serve as a store of value. The worth of the money itself should not change drastically from day to day or hour to hour.

Bitcoin utterly fails this test. Purchasing a bitcoin is a speculative investment.
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It is not a place to park your nonproductive, spendable cash. Further, to my information, no mainstream financial institution will pay interest on bitcoin deposits in the form of more bitcoins. Any return on a bitcoin holding comes solely from a modify in the bitcoin’s value.

Whether the IRS’ decision will help or hurt present bitcoin holders depends on why they wanted bitcoins in the first place. For those hoping to profit directly from bitcoin’s fluctuations within value, this is good news, as the rules for capital gains and failures are relatively favorable to people. This characterization also upholds the way in which some high-profile bitcoin enthusiasts, including the Winklevoss twins, have reported their particular earnings in the absence of clear guidance. (While the new treatment of bitcoin applies to past years, penalty reduction may be available to taxpayers who can demonstrate reasonable cause for their positions. )

For those hoping to use bitcoin to pay for their rent or buy coffee, the decision adds complexity, since spending bitcoin is treated as a taxable form of barter. Those who spend bitcoins, and those who accept them as payment, will both need to note the fair market value of the bitcoin on the date the transaction happens. This will be used to calculate the spender’s capital gains or losses and the receiver’s basis for future increases or losses.

While the triggering event – the transaction – is simple to identify, determining a particular bitcoin’s base, or its holding period to be able to determine whether short-term or long-term capital gains taxes rates apply, may prove difficult. For an investor, that might be an acceptable hassle. But when you are deciding whether to buy your latte with a bitcoin or just pull five dollars out of your wallet, the simplicity of the latter is likely to win the day. The IRS guidance simply makes clear what was already true: Bitcoin isn’t a new form of cash. Its benefits and drawbacks are different.

The IRS has also clarified several other points. If an employer pays a worker in virtual currency, that payment counts as wages for employment tax reasons. And if businesses make payments really worth $600 or more to independent contractors using bitcoin, the businesses will be needed to file Forms 1099, just as they would if they paid the contractors in cash.

Clearer rules may cause brand new administrative headaches for some bitcoin customers, but they could ensure bitcoin’s future at a time when investors have valid reason to be wary. “[Bitcoin is] getting legitimacy, which it didn’t have previously, ” Ajay Vinze, the associate dean at Az State University’s business school, informed The New York Times. He mentioned the IRS decision “puts Bitcoin on a track to becoming an accurate financial asset. ” (1)

Once all bitcoin users can acknowledge and agree on the type of asset it is, that outcome is likelier.

A minority of bitcoin users noticed its former unregulated status as being a feature, not a drawback. Some of them are at odds of government oversight for ideological factors, while others found bitcoin an useful way to conduct illicit business. But since the recent collapse of prominent bitcoin exchange Mt. Gox demonstrated, unregulated bitcoin exchange can lead to catastrophic failures with no safety net. Some users may have thought they were protecting themselves by fleeing to bitcoin to escape the heavily regulated banking industry, but no regulation at all isn’t the solution either.