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Why Bitcoin Can No Longer Work as a Virtual Currency

49 points by jaboutboul 13y ago

jnbiche 13y ago
It's an interesting argument, and fungibility is a critically-important feature of Bitcoin. However, I don't think this is at all an unexpected move by the IRS. Most of us were expecting this all along, and calculating our taxes accordingly. Now, if the U.S. were smart and forward-looking we'd adopt the same policy as Denmark and Germany (Bitcoins aren't taxed). But we're not, and so we didn't.
deleted 13y ago
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jtbigwoo 13y ago
The last couple paragraphs of this article are kind of ridiculous. If the IRS decides that bitcoins are like stocks and bonds, the IRS will accept an average cost basis rather than the user having to account for each individual bitcoin (or fraction of a bitcoin). If it works like inventory, then the taxpayer will have to decide between several accounting strategies (last-in-first-out or first-in-first-out for example) when deciding cost basis. It's complicated, but it's an order of magnitude easier than what the author is suggesting.
- jpmattia 13y ago
  > It's complicated I also have to wonder what tax returns would look like, once automated tracking occurs. Thousands of transactions per year, netting out to very little money (if and when btc/ltc values stablize) will make even electronic returns quite sizeable. I suspect that once the IRS realizes it has DoS'd itself, it will decide that the foreign currency exemption of $600 was there for good reason and revert to currency rules.
  - andrewfong 13y ago
    The IRS doesn't have to implement automated tracking though or read each and every return. It has considerable discretion in which returns it decides to audit, if any.
    - deleted 13y ago
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- jusben1369 13y ago
  What you have to realize though is that none of that matters with a real currency. And the point of the article is that this takes away from Bitcoin being a currency. You're going to have to think pretty hard about whether you want to use an average cost basis or whether you want to be trade specific. And once you choose one you can't change track midway. Given the significant fluctuations in Bitcoin's price that's going to matter. Lastly, you'll see "Fiscal Year" events. Bitcoin appreciated a lot this year? No one is going to want to move in and out in that later months due to the ever increasing tax cost of doing so. Come January there'll be movement again. So you'll get all these weird liquidity events. I'm not for or against BC but the IRS definition is much more significant in terms of the future of Bitcoin.
  - BenoitEssiambre 13y ago
    >What you have to realize though is that none of that matters with a real currency. And the point of the article is that this takes away from Bitcoin being a currency. If you trade foreign currencies you also have to pay capital gains tax. Bitcoin is being treated exactly as other currencies.
    - jusben1369 13y ago
      Except for the fact that it's being treated as a foreign currency vs a dometic one. Not much difference there (sorry I'm being snarky because you're basically reinforcing my point when arguing against it)
      - jtbigwoo 13y ago
        The IRS doesn't have much leeway here, I suspect. IANAL, but it's my understanding that U.S. laws specify dollars as the only currency of the U.S. If people can invent other currencies that the government is then required to accept as currency, I suspect it would take an overhaul of our laws. (And isn't there something in the constitution about the federal government having sole minting power?)
streptomycin 13y ago
All the Bitcoin tax advice I've ever read said to pay capital gains tax on it. That's what I've done in the past, like many other people. The recent news from the IRS just gives us more confidence that the mainstream interpretation was correct all along. So I don't think the sky is falling. Nothing has fundamentally changed. "Bitcoin is like digital gold" remains a semi-decent analogy.
- shittyanalogy 13y ago
  Bitcoin's value is based on market perception. Unfortunately the market may not have been as savvy as yourself. Just because you are and have been willing to treat bitcoins this way doesn't mean that the market is.
  - thisiswrong 13y ago
    Correct. But when the 'market' realizes how Quantative Easing is making them exponentially poorer I guess they might just switch to gold again - perhaps digital gold?.
    - cortesoft 13y ago
      Quantitative Easing is making me exponentially poorer? Inflation has not been a problem since QE has started, so how exactly am I poorer, nevermind 'exponentially' poorer?
      - streptomycin 13y ago
        It's an exponential with a base that is really close to 1. Check back in a few hundred years and you will be outraged at what inflation has done to your savings!
      - zanny 13y ago
        If you put a dollar in a box in 1914 and took it out in 2014 it would be worth 2230.49% less (or, $23 today is one 1914 dollar). If you have cash on hand, that money becomes worth less as quantitative easing expands the monetary base, among other inflationary factors. If you spend that money (on investments, goods, etc) then you are putting your long term value in other things than your currency. The distinction is that the austrian school wants a reliable money sink that grows more scarce and thus more valuable over time. The modern US dollar is anything but a place to store value - instead, the monetary system heavily incentivizes you to get rid of your dollars as quickly as possible. Which is fine, it means money doesn't rot in banks and fall out of circulation. You aren't at maximum velocity but you definitely have good momentum that way. I think the real issue is blaming inflation for wage stagnation (which started around the same time the gold standard was dropped), when in reality it is just business exploitation of supply and demand that keeps wages down while all other goods and services prices rise somewhere in the ballpark of inflation. I love bitcoin, and have a good chunk of my on hand cash stored in it for buying stuff or just having fun trying to play the price, and state currency manipulation does abuse their monopoly on legal counterfeiting to benefit a select few and hurt the rest of us, but it isn't an issue with having an inflating currency, I don't think. It is why I like Doge in many ways. It is going to have constant inflation forever, so it is very predictable, and if it ever got market demand saturation it would only devalue over time so people would keep spending it. And bitcoin is a great peer to that, because we are only going to have a finite number of btc, and once the printing presses stop we will only see that money supply shrink from lost wallets and such, so they will only become more scarce over time.
mathattack 13y ago
This seems like a theoretical argument. From a practical point of view, isn't there just enough anonymity that people won't report it?
- cortesoft 13y ago
  Maybe for transactions between individuals. However, a business couldn't last very long by 'just not reporting it'. This means that very few businesses will accept a bitcoin as payment, and its usefulness will be limited.
  - jnbiche 13y ago
    Yes, but few Bitcoin businesses are holding coins for more than a few seconds, or days at most. So the taxation issues will be minimal (and probably Bitpay and similar services will calculate any minimal taxes due automatically).
    - cortesoft 13y ago
      Converting bit coins to dollars means that there will be fees.. which makes bitcoins no better for a merchant than credit cards.
      - deleted 13y ago
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  - malka 13y ago
    Or, business that are eager to accept bitcoin will simply move to another country, paying effectively 0 USD to the IRS.
- shittyanalogy 13y ago
  Track some high profile cases. Bring them to court for tax evasion. Convict. Huge fines/jail time. Less people are willing to risk it.
- 13y ago
contulluipeste 13y ago
A bigger problem with Bitcoin now is its current transaction fee, which currently it prevents just the micro-payments. If Bitcoin will rise its value (just) 10 times, it will become unfeasible to be used for even more market goods such as books or meals. I'm curious how the debate is still carried around the legal problems when there are unsolved technical ones.
zck 13y ago
How are changes in the value of "traditional", state-backed currency taxed? If I, say, bought 1 Euro for $0.80 in 2000, and sold it for $1.60 in 2008 (prices from https://www.ecb.europa.eu/stats/exchange/eurofxref/html/eurofxref-graph-usd.en.html https://www.ecb.europa.eu/stats/exchange/eurofxref/html/euro...), am I taxed on the difference? Or do currency speculators and day-traders get off tax-free? That seems odd.
- twoodfin 13y ago
  http://www.fxop.com/Forex%20Taxation.html http://www.fxop.com/Forex%20Taxation.html That makes my head hurt, but it sounds like if you hold actual currency and realize gains, those gains are treated as ordinary income (top rate 39.6%), but if you instead trade in qualified currency futures contracts, gains are taxed according to a split formula which pulls the top rate closer to the long term cap gains rate of 15%.
josephagoss 13y ago
Perhaps it can't work as a currency in the United States sure, I always expected the USA to fudge up the acceptance of Bitcoin. The world is a large place and Bitcoin is a very amazing, worldwide thing that I fully believe can continue to work as a currency, outside of the USA of course.
- Gobitron 13y ago
  I agree. It seems to me that we're dealing something whose potential we don't yet fully understand. It might very well fail, but a declaration by the IRS changes nothing except the behavior of speculators. If all Bitcoin is good for is a way to replace Visa/MC then there is nothing all that fundamentally different about it. Dwolla and/or others will take care of that. It is clear that it will take time for the really interesting uses of Bitcoin to emerge (if it survives). Until then, it doesn't matter what anyone declares about it.
lettergram 13y ago
You still don't have to pay capital gains if you purchase something with Bitcoins (rather than converting it to USD first). You do however have to pay the tax on the item.
- paulrr 13y ago
  Not true. Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property? A-6: Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain.
jcbrand 13y ago
Doesn't all of this also apply to Gold? If you bought gold at $400 and then later again at $1000, then you could apply the same non-fungibility argument against it. And yet, currency used to be redeemable into gold. Was it then not a real currency? Didn't the non-fungibility of gold also infect the currencies it backed, thereby making them non-fungible as well? EDIT: of course gold backed currencies were fungible. In the same way, bitcoin is its own backed currency. And hence, also fungible. QED ;)
- gnoway 13y ago
  I don't think so, because when we were on the gold standard, the price of gold - or the exchange rate in US dollars (?) - was fixed.
  - jcbrand 13y ago
    Yeah, that makes sense. So the analogue is flawed because Gold/dollar exchange wasn't floating back then but BTC/dollar is floating currently.
  - mikelarned 13y ago
    I may be interpreting the term fungible incorrectly. At a given point in time, won't one Bitcoin always be exchangeable for another Bitcoin? If I purchased a BC for $1 and the current market price is $1.50, my basis is $1 and my unrealized gain is $.50, but does that gain impact something being fungible? The coin is still mutually interchangeable at that point. I keep reading examples of trading a baseball card. If I had two Babe Ruth cards, one in perfect condition and one with bent edges, the items aren't valued the same and most likely won't be directly traded for one another. They aren't fungible.
    - gnoway 13y ago
      Yes I think you're right, which is why I think the IRS ruling is 'wrong' from the perspective of people who want bitcoin to be legal tender. I think the IRS ruling is entirely 'right' from the perspective of people who don't want to criminalize bitcoin, but have an interest in preventing its use as currency. Like the US Government and the banking industry.
akater 13y ago
If I have a bitcoin in a wallet publicly known as “mine” it still would not count as a valid proof that someone can tax me on it. (I'm not American, it's a thought experiment.) How does one prove the ownership of the wallet? If they just assume it's mine because I once claimed so in public, would they also protect me from btc-related theft, fraud and whatever else property related crimes, either on gederal or state level, just because I claimed the crime had taken place? And if no, what rights exactly do they claim to protect in exchange for taxes collected from this ephemeral “property”? This is ridiculous. Governments hate the fact that people can finally challenge government monopoly on money, and are afraid of losing control, as well as means to get rich at expense of other citizens. [1] I hope people will be reasonable and don't pay any taxes, at least because they gain nothing in return. Again, a proper human rights campaign, with lawyers and cryptocurrency experts working together, and a good targeted media coverage, could end all this until it's too late. If we don't fight for our rights in today's rapidly changing world we shall lose everything. All the great technologies will effectively work against us. [1] http://www.fee.org/the_freeman/detail/the-austrian-influences-on-bitcoin http://www.fee.org/the_freeman/detail/the-austrian-influence...
- genwin 13y ago
  It's an honor system, the same as for other non-tracked property. You sell bitcoin, you pay capital gains taxes to pay for gov't infrastructure and services provided to you (the things they give in exchange for taxes). You get robbed of your bitcoin, if the gov't has no reason to suspect otherwise they trust you when you claim a capital loss to pay less tax.
marcell 13y ago
The author argument would probably not hold up under an IRS audit, and doesn't fully match up with how bitcoin works. First, many bitcoin users "own" their bitcoins using a managed web wallet like Coinbase. In that case, you cannot trace the individuals coins on the blockchain. It is up to the tax payer to report their cost basis. Moreover, it is not obvious from looking at the blockchain which transactions are use to buy goods (a taxable event, according to the IRS), and which transactions are used to transfer money to yourself (the equivalent of moving money from one pocket to another; not a taxable event). Thus, the IRS ruling, while onerous, does not really affect the "fungibility" of bitcoin.
- thisiswrong 13y ago
  > the IRS ruling, while onerous, does not really affect the "fungibility" of bitcoin. But it's going to be another hard blow to US tech innovation, which will simply move abroad - far from the IRS and NSA.
- patio11 13y ago
  The IRS is not limited to the technical realities of Bitcoin in coming up with explanations for how it interacts with the tax laws of the United States. "Individual coins cannot be traced on the blockchain" doesn't affect their operations in an iota. The IRS is well-adapted to environments where there does not exist a single public record of every transaction, principally because that is pretty novel. If the IRS believes that people are misreporting bases in such a manner as to meaningfully affect their tax obligations via using Coinbase, all they have to do is send Coinbase a letter.
- acomjean 13y ago
  I think this will effect corporate use of bit-coins. It might slow bitcoin adoption a bit, but it also has the effect of making them legit. This should also keep accountants busy. They always seem to be anyway, now more so. Its part of bitcoin "growing-up", so to speak and the IRS getting ahead of all the newfound wealth generated from these coins.
- clarkm 13y ago
  The reference client doesn't even provide a way to choose specific bitcoins to use when sending a payment. And even if it did, do they really expect users to keep track of every single address in their wallet and the date of acquisition of its individual bitcoins? As it currently stands, if your client decides to spend a bitcoin from an address you owned for less than a year, any gains would be taxed as ordinary income.
Scorpion 13y ago
So if I sell at a loss, I get a tax break?
- pg_is_a_butt 13y ago
  yes. same with anything else you buy and sell using USD.
moe 13y ago
Yes. And according to the laws of physics, a bumblebee can't fly. It's just - the bumblebee doesn't know that.
- shittyanalogy 13y ago
  wat?
TrainedMonkey 13y ago
"To tax Bitcoin as property, he says, destroys its fungibility: One Bitcoin can no longer be exchanged for another." I think that is false. From what I understand you only get taxed when you realize the value of bitcoin, such as purchasing something with it.
lhgaghl 13y ago
George and I trade Pokemon cards a lot. Daddy says I can't play with Pokemon cards anymore. That means I can't hang out with George. Also, there are other countries besides the IRS one (with an order of magnitude more people). This article is pure trash and you should kill yourself if you agree with it.
- jusben1369 13y ago
  For a moment I almost felt like you were advocating violence in response to feeling your belief system being threatened.
mr_spothawk 13y ago
How can this apply to exchanging BTC for services? If I exchange 1 BTC for 1 year of service, and that company exchanges 100 BTC for 1 year of work by an employee... how does the tax get collected?
captainmuon 13y ago
I don't know... personally I don't even expect Bitcoin to be a good "medium of value" or "commonly desired medium of exchange" in an economic sense. The main raison d'etre for bitcoin for me is, should I some day have the desire to do so, to buy drugs and other things deemed illegal, anonymously. (Since I don't buy such things, I don't use bitcoin at the moment.) For this purpose, bitcoins only have to hold their value for a miniscule amount of time, from the time I buy them to the time I've transferred them (and to the time the reciever of the bitcoins has done something with them). It is theoretically even possible to reduce this time to milliseconds. (I'd buy bitcoins in person or via wire transfer, they'd get passed through a tumbler, do the transaction I'm interested in, and my transaction gets matched with other bitcoin<->money transactions somewhere else on the planet. Most individuals would only hold the coins for split-seconds.) Basically, I view it as a kind of digital Hawala [1]. For this purpose, the current value stability is much better than needed. [1] http://en.wikipedia.org/wiki/Hawala http://en.wikipedia.org/wiki/Hawala
pg_is_a_butt 13y ago
just because you don't understand tax laws or "virtual currency" doesn't mean that bitcoin can no longer work. can poker no longer work as a game because winnings are taxable? does every bet count? every pot raked in? is it session based? what if you are playing 2 tables at once online or in some casino that was crazy enough to let you? those are all tax oddities that directly tie to the problems this idiot is laying out for bitcoin. at the end of the day, you just take all the money you spent buying bitcoins, find the value of all the things you bought with bitcoin, then subtract and pay capital gains taxes on the net. it's braindead simple. again, this article was written by a fear-mongering idiot that doesn't understand anything.
nostrademons 13y ago
What happens when people start pricing things only in cryptocurrency, and there is no dollar value attached to the transaction? This is fairly rare in the Bitcoin world, where many places sell via payment gateway that immediately converts back to $USD, but is common in the Dogecoin world, where many of the goods exchanged are intangibles (tipping, donations) or one-off items (see r/dogemarket for examples; there are a lot of handmade goods or services).
lazyant 13y ago
what happens tax-wise if I buy $100 of Euros and in a month I sell them at $150?
- BenoitEssiambre 13y ago
  I'm pretty sure, as with Bitcoins, you would pay tax on $50: see http://www.investopedia.com/articles/forex/09/forex-taxation-basics.asp http://www.investopedia.com/articles/forex/09/forex-taxation...
  - lazyant 13y ago
    So then I don't understand the point this article is trying to make, wouldn't this would reinforce the idea that bitcoin is like a currency (a foreign one for ex)?
BenoitEssiambre 13y ago
I don't get all the fuss. Bitcoin is being treated as any other currency. If I make a profit buying and selling Euros I also have to pay capital gains tax. What am I missing here?

49 points by jaboutboul 13y ago

It's an interesting argument, and fungibility is a critically-important feature of Bitcoin. However, I don't think this is at all an unexpected move by the IRS. Most of us were expecting this all along, and calculating our taxes accordingly. Now, if the U.S. were smart and forward-looking we'd adopt the same policy as Denmark and Germany (Bitcoins aren't taxed). But we're not, and so we didn't.

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jtbigwoo 13y ago

The last couple paragraphs of this article are kind of ridiculous. If the IRS decides that bitcoins are like stocks and bonds, the IRS will accept an average cost basis rather than the user having to account for each individual bitcoin (or fraction of a bitcoin). If it works like inventory, then the taxpayer will have to decide between several accounting strategies (last-in-first-out or first-in-first-out for example) when deciding cost basis. It's complicated, but it's an order of magnitude easier than what the author is suggesting.

jpmattia 13y ago
> It's complicated I also have to wonder what tax returns would look like, once automated tracking occurs. Thousands of transactions per year, netting out to very little money (if and when btc/ltc values stablize) will make even electronic returns quite sizeable. I suspect that once the IRS realizes it has DoS'd itself, it will decide that the foreign currency exemption of $600 was there for good reason and revert to currency rules.
- andrewfong 13y ago
  The IRS doesn't have to implement automated tracking though or read each and every return. It has considerable discretion in which returns it decides to audit, if any.
  - deleted 13y ago
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jusben1369 13y ago
What you have to realize though is that none of that matters with a real currency. And the point of the article is that this takes away from Bitcoin being a currency. You're going to have to think pretty hard about whether you want to use an average cost basis or whether you want to be trade specific. And once you choose one you can't change track midway. Given the significant fluctuations in Bitcoin's price that's going to matter. Lastly, you'll see "Fiscal Year" events. Bitcoin appreciated a lot this year? No one is going to want to move in and out in that later months due to the ever increasing tax cost of doing so. Come January there'll be movement again. So you'll get all these weird liquidity events. I'm not for or against BC but the IRS definition is much more significant in terms of the future of Bitcoin.
- BenoitEssiambre 13y ago
  >What you have to realize though is that none of that matters with a real currency. And the point of the article is that this takes away from Bitcoin being a currency. If you trade foreign currencies you also have to pay capital gains tax. Bitcoin is being treated exactly as other currencies.
  - jusben1369 13y ago
    Except for the fact that it's being treated as a foreign currency vs a dometic one. Not much difference there (sorry I'm being snarky because you're basically reinforcing my point when arguing against it)
    - jtbigwoo 13y ago
      The IRS doesn't have much leeway here, I suspect. IANAL, but it's my understanding that U.S. laws specify dollars as the only currency of the U.S. If people can invent other currencies that the government is then required to accept as currency, I suspect it would take an overhaul of our laws. (And isn't there something in the constitution about the federal government having sole minting power?)

streptomycin 13y ago

All the Bitcoin tax advice I've ever read said to pay capital gains tax on it. That's what I've done in the past, like many other people. The recent news from the IRS just gives us more confidence that the mainstream interpretation was correct all along. So I don't think the sky is falling. Nothing has fundamentally changed. "Bitcoin is like digital gold" remains a semi-decent analogy.

shittyanalogy 13y ago
Bitcoin's value is based on market perception. Unfortunately the market may not have been as savvy as yourself. Just because you are and have been willing to treat bitcoins this way doesn't mean that the market is.
- thisiswrong 13y ago
  Correct. But when the 'market' realizes how Quantative Easing is making them exponentially poorer I guess they might just switch to gold again - perhaps digital gold?.
  - cortesoft 13y ago
    Quantitative Easing is making me exponentially poorer? Inflation has not been a problem since QE has started, so how exactly am I poorer, nevermind 'exponentially' poorer?
    - streptomycin 13y ago
      It's an exponential with a base that is really close to 1. Check back in a few hundred years and you will be outraged at what inflation has done to your savings!
    - zanny 13y ago
      If you put a dollar in a box in 1914 and took it out in 2014 it would be worth 2230.49% less (or, $23 today is one 1914 dollar). If you have cash on hand, that money becomes worth less as quantitative easing expands the monetary base, among other inflationary factors. If you spend that money (on investments, goods, etc) then you are putting your long term value in other things than your currency. The distinction is that the austrian school wants a reliable money sink that grows more scarce and thus more valuable over time. The modern US dollar is anything but a place to store value - instead, the monetary system heavily incentivizes you to get rid of your dollars as quickly as possible. Which is fine, it means money doesn't rot in banks and fall out of circulation. You aren't at maximum velocity but you definitely have good momentum that way. I think the real issue is blaming inflation for wage stagnation (which started around the same time the gold standard was dropped), when in reality it is just business exploitation of supply and demand that keeps wages down while all other goods and services prices rise somewhere in the ballpark of inflation. I love bitcoin, and have a good chunk of my on hand cash stored in it for buying stuff or just having fun trying to play the price, and state currency manipulation does abuse their monopoly on legal counterfeiting to benefit a select few and hurt the rest of us, but it isn't an issue with having an inflating currency, I don't think. It is why I like Doge in many ways. It is going to have constant inflation forever, so it is very predictable, and if it ever got market demand saturation it would only devalue over time so people would keep spending it. And bitcoin is a great peer to that, because we are only going to have a finite number of btc, and once the printing presses stop we will only see that money supply shrink from lost wallets and such, so they will only become more scarce over time.

mathattack 13y ago

This seems like a theoretical argument. From a practical point of view, isn't there just enough anonymity that people won't report it?

cortesoft 13y ago
Maybe for transactions between individuals. However, a business couldn't last very long by 'just not reporting it'. This means that very few businesses will accept a bitcoin as payment, and its usefulness will be limited.
- jnbiche 13y ago
  Yes, but few Bitcoin businesses are holding coins for more than a few seconds, or days at most. So the taxation issues will be minimal (and probably Bitpay and similar services will calculate any minimal taxes due automatically).
  - cortesoft 13y ago
    Converting bit coins to dollars means that there will be fees.. which makes bitcoins no better for a merchant than credit cards.
    - deleted 13y ago
      [deleted]
- malka 13y ago
  Or, business that are eager to accept bitcoin will simply move to another country, paying effectively 0 USD to the IRS.
shittyanalogy 13y ago
Track some high profile cases. Bring them to court for tax evasion. Convict. Huge fines/jail time. Less people are willing to risk it.
13y ago

contulluipeste 13y ago

A bigger problem with Bitcoin now is its current transaction fee, which currently it prevents just the micro-payments. If Bitcoin will rise its value (just) 10 times, it will become unfeasible to be used for even more market goods such as books or meals. I'm curious how the debate is still carried around the legal problems when there are unsolved technical ones.

zck 13y ago

How are changes in the value of "traditional", state-backed currency taxed? If I, say, bought 1 Euro for $0.80 in 2000, and sold it for $1.60 in 2008 (prices from https://www.ecb.europa.eu/stats/exchange/eurofxref/html/eurofxref-graph-usd.en.html https://www.ecb.europa.eu/stats/exchange/eurofxref/html/euro...), am I taxed on the difference? Or do currency speculators and day-traders get off tax-free? That seems odd.

twoodfin 13y ago
http://www.fxop.com/Forex%20Taxation.html http://www.fxop.com/Forex%20Taxation.html That makes my head hurt, but it sounds like if you hold actual currency and realize gains, those gains are treated as ordinary income (top rate 39.6%), but if you instead trade in qualified currency futures contracts, gains are taxed according to a split formula which pulls the top rate closer to the long term cap gains rate of 15%.

josephagoss 13y ago

Perhaps it can't work as a currency in the United States sure, I always expected the USA to fudge up the acceptance of Bitcoin. The world is a large place and Bitcoin is a very amazing, worldwide thing that I fully believe can continue to work as a currency, outside of the USA of course.

Gobitron 13y ago
I agree. It seems to me that we're dealing something whose potential we don't yet fully understand. It might very well fail, but a declaration by the IRS changes nothing except the behavior of speculators. If all Bitcoin is good for is a way to replace Visa/MC then there is nothing all that fundamentally different about it. Dwolla and/or others will take care of that. It is clear that it will take time for the really interesting uses of Bitcoin to emerge (if it survives). Until then, it doesn't matter what anyone declares about it.

lettergram 13y ago

You still don't have to pay capital gains if you purchase something with Bitcoins (rather than converting it to USD first). You do however have to pay the tax on the item.

paulrr 13y ago
Not true. Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property? A-6: Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain.

jcbrand 13y ago

Doesn't all of this also apply to Gold? If you bought gold at $400 and then later again at $1000, then you could apply the same non-fungibility argument against it. And yet, currency used to be redeemable into gold. Was it then not a real currency? Didn't the non-fungibility of gold also infect the currencies it backed, thereby making them non-fungible as well? EDIT: of course gold backed currencies were fungible. In the same way, bitcoin is its own backed currency. And hence, also fungible. QED ;)

gnoway 13y ago
I don't think so, because when we were on the gold standard, the price of gold - or the exchange rate in US dollars (?) - was fixed.
- jcbrand 13y ago
  Yeah, that makes sense. So the analogue is flawed because Gold/dollar exchange wasn't floating back then but BTC/dollar is floating currently.
- mikelarned 13y ago
  I may be interpreting the term fungible incorrectly. At a given point in time, won't one Bitcoin always be exchangeable for another Bitcoin? If I purchased a BC for $1 and the current market price is $1.50, my basis is $1 and my unrealized gain is $.50, but does that gain impact something being fungible? The coin is still mutually interchangeable at that point. I keep reading examples of trading a baseball card. If I had two Babe Ruth cards, one in perfect condition and one with bent edges, the items aren't valued the same and most likely won't be directly traded for one another. They aren't fungible.
  - gnoway 13y ago
    Yes I think you're right, which is why I think the IRS ruling is 'wrong' from the perspective of people who want bitcoin to be legal tender. I think the IRS ruling is entirely 'right' from the perspective of people who don't want to criminalize bitcoin, but have an interest in preventing its use as currency. Like the US Government and the banking industry.

akater 13y ago

If I have a bitcoin in a wallet publicly known as “mine” it still would not count as a valid proof that someone can tax me on it. (I'm not American, it's a thought experiment.) How does one prove the ownership of the wallet? If they just assume it's mine because I once claimed so in public, would they also protect me from btc-related theft, fraud and whatever else property related crimes, either on gederal or state level, just because I claimed the crime had taken place? And if no, what rights exactly do they claim to protect in exchange for taxes collected from this ephemeral “property”? This is ridiculous. Governments hate the fact that people can finally challenge government monopoly on money, and are afraid of losing control, as well as means to get rich at expense of other citizens. [1] I hope people will be reasonable and don't pay any taxes, at least because they gain nothing in return. Again, a proper human rights campaign, with lawyers and cryptocurrency experts working together, and a good targeted media coverage, could end all this until it's too late. If we don't fight for our rights in today's rapidly changing world we shall lose everything. All the great technologies will effectively work against us. [1] http://www.fee.org/the_freeman/detail/the-austrian-influences-on-bitcoin http://www.fee.org/the_freeman/detail/the-austrian-influence...

genwin 13y ago
It's an honor system, the same as for other non-tracked property. You sell bitcoin, you pay capital gains taxes to pay for gov't infrastructure and services provided to you (the things they give in exchange for taxes). You get robbed of your bitcoin, if the gov't has no reason to suspect otherwise they trust you when you claim a capital loss to pay less tax.

marcell 13y ago

The author argument would probably not hold up under an IRS audit, and doesn't fully match up with how bitcoin works. First, many bitcoin users "own" their bitcoins using a managed web wallet like Coinbase. In that case, you cannot trace the individuals coins on the blockchain. It is up to the tax payer to report their cost basis. Moreover, it is not obvious from looking at the blockchain which transactions are use to buy goods (a taxable event, according to the IRS), and which transactions are used to transfer money to yourself (the equivalent of moving money from one pocket to another; not a taxable event). Thus, the IRS ruling, while onerous, does not really affect the "fungibility" of bitcoin.

thisiswrong 13y ago
> the IRS ruling, while onerous, does not really affect the "fungibility" of bitcoin. But it's going to be another hard blow to US tech innovation, which will simply move abroad - far from the IRS and NSA.
patio11 13y ago
The IRS is not limited to the technical realities of Bitcoin in coming up with explanations for how it interacts with the tax laws of the United States. "Individual coins cannot be traced on the blockchain" doesn't affect their operations in an iota. The IRS is well-adapted to environments where there does not exist a single public record of every transaction, principally because that is pretty novel. If the IRS believes that people are misreporting bases in such a manner as to meaningfully affect their tax obligations via using Coinbase, all they have to do is send Coinbase a letter.
acomjean 13y ago
I think this will effect corporate use of bit-coins. It might slow bitcoin adoption a bit, but it also has the effect of making them legit. This should also keep accountants busy. They always seem to be anyway, now more so. Its part of bitcoin "growing-up", so to speak and the IRS getting ahead of all the newfound wealth generated from these coins.
clarkm 13y ago
The reference client doesn't even provide a way to choose specific bitcoins to use when sending a payment. And even if it did, do they really expect users to keep track of every single address in their wallet and the date of acquisition of its individual bitcoins? As it currently stands, if your client decides to spend a bitcoin from an address you owned for less than a year, any gains would be taxed as ordinary income.

Scorpion 13y ago

So if I sell at a loss, I get a tax break?

pg_is_a_butt 13y ago
yes. same with anything else you buy and sell using USD.

moe 13y ago

Yes. And according to the laws of physics, a bumblebee can't fly. It's just - the bumblebee doesn't know that.

shittyanalogy 13y ago
wat?

TrainedMonkey 13y ago

"To tax Bitcoin as property, he says, destroys its fungibility: One Bitcoin can no longer be exchanged for another." I think that is false. From what I understand you only get taxed when you realize the value of bitcoin, such as purchasing something with it.

lhgaghl 13y ago

George and I trade Pokemon cards a lot. Daddy says I can't play with Pokemon cards anymore. That means I can't hang out with George. Also, there are other countries besides the IRS one (with an order of magnitude more people). This article is pure trash and you should kill yourself if you agree with it.

jusben1369 13y ago
For a moment I almost felt like you were advocating violence in response to feeling your belief system being threatened.

mr_spothawk 13y ago

How can this apply to exchanging BTC for services? If I exchange 1 BTC for 1 year of service, and that company exchanges 100 BTC for 1 year of work by an employee... how does the tax get collected?

captainmuon 13y ago

I don't know... personally I don't even expect Bitcoin to be a good "medium of value" or "commonly desired medium of exchange" in an economic sense. The main raison d'etre for bitcoin for me is, should I some day have the desire to do so, to buy drugs and other things deemed illegal, anonymously. (Since I don't buy such things, I don't use bitcoin at the moment.) For this purpose, bitcoins only have to hold their value for a miniscule amount of time, from the time I buy them to the time I've transferred them (and to the time the reciever of the bitcoins has done something with them). It is theoretically even possible to reduce this time to milliseconds. (I'd buy bitcoins in person or via wire transfer, they'd get passed through a tumbler, do the transaction I'm interested in, and my transaction gets matched with other bitcoin<->money transactions somewhere else on the planet. Most individuals would only hold the coins for split-seconds.) Basically, I view it as a kind of digital Hawala [1]. For this purpose, the current value stability is much better than needed. [1] http://en.wikipedia.org/wiki/Hawala http://en.wikipedia.org/wiki/Hawala

pg_is_a_butt 13y ago

just because you don't understand tax laws or "virtual currency" doesn't mean that bitcoin can no longer work. can poker no longer work as a game because winnings are taxable? does every bet count? every pot raked in? is it session based? what if you are playing 2 tables at once online or in some casino that was crazy enough to let you? those are all tax oddities that directly tie to the problems this idiot is laying out for bitcoin. at the end of the day, you just take all the money you spent buying bitcoins, find the value of all the things you bought with bitcoin, then subtract and pay capital gains taxes on the net. it's braindead simple. again, this article was written by a fear-mongering idiot that doesn't understand anything.

nostrademons 13y ago

What happens when people start pricing things only in cryptocurrency, and there is no dollar value attached to the transaction? This is fairly rare in the Bitcoin world, where many places sell via payment gateway that immediately converts back to $USD, but is common in the Dogecoin world, where many of the goods exchanged are intangibles (tipping, donations) or one-off items (see r/dogemarket for examples; there are a lot of handmade goods or services).

lazyant 13y ago

what happens tax-wise if I buy $100 of Euros and in a month I sell them at $150?

BenoitEssiambre 13y ago
I'm pretty sure, as with Bitcoins, you would pay tax on $50: see http://www.investopedia.com/articles/forex/09/forex-taxation-basics.asp http://www.investopedia.com/articles/forex/09/forex-taxation...
- lazyant 13y ago
  So then I don't understand the point this article is trying to make, wouldn't this would reinforce the idea that bitcoin is like a currency (a foreign one for ex)?

BenoitEssiambre 13y ago

I don't get all the fuss. Bitcoin is being treated as any other currency. If I make a profit buying and selling Euros I also have to pay capital gains tax. What am I missing here?