The IRS Verdict for Bitcoin

irs verdict bitcoin

Bitcoin used to be so much alike with the Schrodinger’s currency. With no regulatory spectators, it could declare to be both a property and money the same as well.

This time the IRS or Internal Revenue Service started to open the box which made the condition of this virtual currency established – with regards to the federal tax purposes at least.

Just recently, the IRS has issued guideline on how they will deal with bitcoin as well as other electronic competitor that is stateless. Their simple answer: not as a currency but as a property. Including other digital currencies that are able to be exchanged for bank notes or coins will begin to be considered mostly as a capital asset and also in some few circumstance as inventory.

Bitcoin owners that are not dealers likely to be subjected to capital gains tax upon value increase. Miners of bitcoin who does the currency’s algorithm unlocking have to declare their finds as an income, just like what other miners did upon extraction of more traditional resources.

Although this decision is not likely to create much troublesome, it’s worthy to be noted. Since IRS has made a decision now, bitcoin enthusiasts and investors can now proceed ahead since they have gained more accurate understanding with regards to what they are virtually dealing with. A bitcoin holder that is eager to adhere with the tax law knows what to do so now, rather than try to evade it.

Despite IRS’ determination of bitcoin as a property and not a money, I beg to disagree even if its stability is still a question. It is not only the digital currency that keeps on dealing with today’s floating exchange rates, but also our conventional currency such as Dollars, Euros, Pounds, etc. since all of their values changes weekly or yearly as well.

It’s true that a money’s primary role is to be used as a store of value and it’s worth shouldn’t change greatly every single day or even hourly. But money, aside from being a store of value is as well utilized as a medium of exchange and a unit of account, which I think has been the bitcoin’s basic function since then.

Yes, bitcoin buying may be an experimental investment to some. But its instability should not dictate for it be voided as a currency because primarily the fundamental thing that allows a currency to be valuable to people is its liquidity.

The decision of IRS that will either help or damage bitcoin holders is highly dependent on the primary reason of why they want bitcoins. For people who is expecting to acquire profit directly from value fluctuations of bitcoin, this is really good news, since the capital gains and losses rules are relatively in favor to taxpayers.

This characterization is applicable as well even to some, top-level famous bitcoin enthusiasts that include the Winklevoss twins, which have earnings reported with no clear guidance. (Even if the recent bitcoin treatment is suitable for the previous years, tax payers may avail the penalty relief who can state the cause reasonable for their position.

For people who relies on bitcoin use for buying coffee, or rent payment, this decision increases complexity, since bitcoin spending is considered a taxable barter form. People who use bitcoin to spend as well as those who take it as payment may both need to take note the bitcoin’s fair market value during the time of that transaction date. This will be utilized to calculate the capital gains or losses of the spender and also the receiver’s basis with regards to future losses or gains.

Even if the provoking event – the transaction – is just easy to recognize, figuring a specific bitcoin basis out, or its period of holding so that you can determine whether long-term or short-term capital gains tax rates applies, may turn out really challenging. For the investor’s perpective, it may be considered as an acceptable hassle.

However, the moment you to decide whether to buy coffee using a bitcoin or just use a five-dollar bill from your wallet, the latter’s simplicity will likely prevail. The IRS guidance plainly makes everything clearer than what was true already, that bitcoin is a not a brand new cash form. Its drawbacks and benefits are different.

The IRS made clarification with several points also. If it happens that a worker’s employer pays him in digital currency, that salary is regarded as wages for the purposes of employment tax. Plus if businesses pays a of worth 600 USD or higher to an independent contractor with bitcoin, these businesses will be enforced to file the Forms 1099, just like what happens given that the contractors were paid in cash.

Much clearer regulations may bring new administrative migraines for some users of bitcoins, however they could secure the future of bitcoin during a time when the investors have acceptable reasons to be cautious. Ajay Vinze, who is an associate dean of the business school at Arizona State University to NY times that bitcoin is starting to be legitimate which was not the case before. He also stated that the decision of the IRS puts the Bitcoin in place to becoming a real financial asset.

The moment all bitcoin enthusiast can agree and recognize what asset type it is, that would be a much likelier outcome.

Just a small number of bitcoin users have seen its unregulated status before not a drawback but as a strength. A few of them disagree to the government oversight because of ideological reasons, while some others have found bitcoin as a valuable way to do illicit business.

However, due to the collapse of famous exchange of bitcoin Mt. Gox recently, it demonstrated that bitcoin exchange that is unregulated may result to catastrophic losses bearing no safety net. There are users who have thought that they were guarding themselves by using bitcoin to avoid the massively regulated banking industry, however not having a regulation at all is not the solution as well.

The IRS is right upon saying that bitcoin needs to be regarded as a property. Maybe this certainty will guard the future of this asset even if it develops to be a poor currency, it might be beneficial to those people who needs to have it as a property for commercial or speculative reasons.

Written by Melvin Draupnir on May 19, 2017.