How the IRS Guidelines on Bitcoin may affect the Crypto-Community

April 2, 2014 06:00 UTC

The recent IRS Tax Guidelines on Bitcoin has everyone in a stir. If you haven’t read about it, go ahead a read it now.

The full release is here.

Essentially, the Inland Revenue Service will be treating Bitcoin as property for tax purposes. What this means is that you will have to pay retroactive taxes on its gains from the original price you bought it. The capital gains tax, for those who do not know what it is, is a tax on a non-inventory asset that gains value, like stocks, bonds and precious metals.

The IRS defines it as such:

“Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal use items like household furnishings, and stocks or bonds held as investments. When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for is a capital gain or a capital loss.”

In the US, the long-term capital gains tax for individuals making less than $36,250 is at 0%, for individuals making $36,250 to $400,000 is at 15% and for $400,000 to $450,000 is at 20%.

For the short term tax rates, they could range from 10$ to 39.6% depending on your income.

Additionally, those making $200,000 or more will have an additional 3.8% investment tax aimed at funding Medicare.

Therefore, if you buy anything with Bitcoin in the US, you are technically required to calculate the price at which you spent the Bitcoin minus the price you originally bought the Bitcoin multiplied by the amount of Bitcoin you spent.

Tax = ( (Spending BTC Price – Original BTC Price) * amount of BTC spent ) Applicable tax rate

As you can see, this may get very confusing. What if I bought 1.3 BTC at $250 and then bought .5 BTC at $450. Then I spent .002 BTC at $600. Which is the original price? How will the IRS verify that? and so on and so on. This IRS guideline kinda throws a wrench in Bitcoin’s fungibility.

[divider]What could this mean for BTC businesses?[/divider]

Said the IRS:

Q-3:  Must a taxpayer who receives virtual currency as payment for goods or services include in computing gross income the fair market value of the virtual currency?

A-3: Yes.  A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.  See Publication 525, Taxable and Nontaxable Income, for more information on miscellaneous income from exchanges involving property or services.

Overstock.com has remarked on the huge success of Bitcoin in their business. After amazingly exceeding their expectations by months ahead of projected returns, they have stated that they keep 10% of their BTC revenue instead of immediately cashing out. However this taxing guideline may seem, I asked media representatives from the Big O and this is their statement:

“ A year ago, commentators were discussing the tax treatment of virtual currencies, and many in the virtual currency community were not surprised by the IRS notice. One thing is clear: The IRS notice brings certainty to the domestic tax treatment of virtual currency, and settled tax treatment is one more step in what we hope will be a growing acceptance and use of virtual currency.  The notice doesn’t dissuade us from accepting or holding the 10 percent of bitcoin we chose to retain.  While it is hard to know how  the IRS ruling will effect consumer behavior, those people who bought bitcoin at prices much higher than current rates might spend that bitcoin at Overstock.com as a way of realizing a capital loss. “

Coinbase also ‘coined’ in on the matter:

“ The IRS ruling provides clarity and validation which enables bitcoin to be accessible to the masses. Coinbase is prepared to help consumers and merchants meet the guidelines. ”

[divider]What could this mean to BTC individuals?[/divider]

It depends on the individual, but this writer has his doubts on the ability of the IRS to verify BTC ownership. For one, the pseudo anonymity of the Bitcoin protocol will make it significantly difficult to tie individuals to Bitcoin accounts.

Furthermore, the IRS says that they do intend to tax the miners as well.

Q-8:  Does a taxpayer who “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?

A-8: Yes, when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.  See Publication 525,Taxable and Nontaxable Income, for more information on taxable income.

Will it be for the IRS to take on miners? Mining pools may be targeted, but individual miners? Only time will tell. It’s very possible that there will be a number of examples made of some Bitcoin users who failed to correctly or fully respond with the tax guidelines on Bitcoin. Prepare for some over-sensationalized news on some jailed bitcoin users.

However, I must remind readers that CryptoCoinsNews does not endorse criminal actions including tax evasion. The best thing for the crypto-community to do is to attain legitimacy and following local tax laws may be an avenue to do so.

[divider]This writer’s verdict[/divider]

All in all, clear and concise guidelines are the best thing for Bitcoin now. Instead of uncertainty and worry hovering over the market like a wishy-washy policy that China and other governments have had, a standard set of rules will be the door to a lot of investors. While taxes may turn off many big businesses from bitcoin, the response from Overstock and Coinbase and other institutions has been generally optimistic on the setting of formalized codes.

The next best thing would be to lower taxes and treat Bitcoin like a currency as it should be. I suggest, as the mainstream consensus gradually comes around, to contact local lawmakers to push for a better tax policy than applying harsh capital gains at every transaction.

Last modified: April 1, 2014 21:00 UTC

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Calvin Tran is a filmmaker attending NYU's Tisch School of the Arts. He is interested in economics as a way to see the world and inspires him to create media that illustrates the power of freedom and technology in improving all of our lives.