The IRS Takes A Position On Bitcoin

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

The Internal Revenue Service has opened the box, and also the digital currency’s state is established – for federal tax purposes.

The IRS recently issued guidance on how it can treat bitching, and any other stateless electronic competitor. The brief answer: as land, not currency. Bitcoin, along with other virtual currencies which may be exchanged for legal tender, and will be handled in most cases as a capital asset, and in a couple of scenarios as inventory. Bitcoin holders who are not dealers will be subject to capital gains tax on gains in value. Bitcoin “miners,” that unlock the money’s algorithms, will have to report their finds as earnings, just as other miners do when extracting more traditional sources.

Though this choice is unlikely to cause much turbulence, it is worth noting. Now the IRS has made a call, investors and bitching fans can proceed with a more accurate understanding of what they have been (virtually) holding. A bitcoin holder that wants to obey the tax law, instead of preventing it, now understands how to do so.

I think that the IRS is right in determining that bitching is not money. Bitcoin, and other virtual currencies like it, is too unstable in value in order for it to realistically be known as a kind of money. In this era of floating exchange rates, it’s correct that the value of nearly all monies varies from week to week or year to year relative to some specific benchmark, whether it’s the dollar or a barrel of oil. But a crucial quality of money is to function 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. Buying a bitcoin doubler is a speculative investment. It’s not a place to park your idle, spendable cash. Further, to my knowledge, no mainstream financial institution will pay interest on bitcoin deposits in the form of more bitching. Any return on a bitcoin holding comes only from an alteration in the bitcoin’s value.

Whether the IRS’ decision will help or hurt current bitching holders depends on why they wanted to bitch in the first place. For those hoping to profit directly from bitcoin’s fluctuations in value, this is good news, as the rules for capital gains and losses are relatively favorable to taxpayers. (While the new treatment of bitcoin is applicable to past years, penalty relief may be available to taxpayers who can demonstrate reasonable cause for their positions.)

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

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 purposes. And if businesses make payments worth $600 or more to independent contractors using bitcoin, the businesses will be required to file Forms 1099, just as they would if they paid the contractors in cash.

Clearer rules may cause new administrative headaches for some bitcoin users, but they could ensure bitcoin’s future at a time when investors have good reason to be wary. ” [Bitcoin is] getting validity, which it did not possess previously,” Ajay Vinze, the associate dean at Arizona State University’s business school, told The New York Times. He said the IRS decision “puts Bitcoin on a track to becoming a real financial advantage” (1)

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

A minority of bitcoin users watched its former unregulated standing for a feature, not a drawback. Some of them oppose government oversight for ideological reasons, while others discovered bitcoin a useful way to conduct small business. But as the recent collapse of prominent bitcoin market Mt. Gox revealed, unregulated bitcoin exchange may lead to devastating losses with no safety net. Some users might have thought they were protecting themselves fleeing to bitcoin to escape the heavily regulated banking industry, but no regulation at all isn’t the answer either.