Channel: David Hay
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Bitcoin was something like Schrodinger’s currency. Without regulatory observers, it might claim to be money and land in precisely the exact same time.
Now the Internal Revenue Service has opened the box, and also the digital money’s state is established – at least for federal tax purposes.
The IRS recently issued guidance on how it will treat bitcoin, and any other stateless digital competitor. The brief answer: as land, not money. Bitcoin, together with other virtual currencies which may be traded for legal tender, will be treated in most instances as a capital asset, and in a couple of situations as inventory. Bitcoin holders that are not traders will be subject to capital gains tax on gains in value. Bitcoin”miners,” who unlock the money’s algorithms, will have to report their finds as earnings, just as other miners do when extracting more conventional resources.
Though this decision is not likely to cause much turbulence, it’s worth noting. Now that the IRS has made a call, investors and bitcoin fans can proceed with a more accurate comprehension of what they are (virtually) holding. A bitcoin holder who would like to follow the tax law, instead of preventing it, now knows the way to do so.
I believe that the IRS is correct in determining that bitcoin isn’t money. Bitcoin, and other digital currencies like it, is too shaky in value for it to realistically be called a kind of currency. In this era of floating exchange rates, it is a fact that the value of almost all monies varies from week to week or year to year relative to some specific benchmark, while it’s the dollar or a barrel of oil. However, a key feature of money is to function as a store of value. The worth of the money itself shouldn’t change drastically from day to day or hour to hour.
Bitcoin completely fails this test. Purchasing a bitcoin 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 attention on bitcoin deposits in the kind of more bitcoins. Any return on a bitcoin holding comes only from a change 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 location. For those hoping to gain directly from bitcoin’s changes in value, this is great news, as the rules for capital gains and losses are comparatively favorable to taxpayers. This characterization also upholds how some high-profile bitcoin fans, such as the Winklevoss twins, have reported their earnings in the absence of clear guidance. (While the new treatment of bitcoin is applicable to previous decades, penalty relief could be available to taxpayers who can demonstrate reasonable cause for their rankings.)
For those hoping to use bitcoin to cover their rent or purchase coffee, the choice adds complexity, since spending bitcoin is treated as a taxable form of barter. People who invest bitcoins, and those who accept them as payment, will need to be aware the fair market value of the bitcoin on the date the transaction occurs. This will be used to compute the spender’s capital gains or losses and the recipient’s foundation for future losses or gains.
While the triggering event – the trade – is easy to recognize, determining a specific bitcoin’s foundation, or its holding period to be able to find out whether long-term or short-term capital gains tax rates apply, may prove challenging. For an investor, that may be an acceptable hassle. But when you’re deciding whether to purchase your latte with a bitcoin or simply pull five dollars from your wallet, the ease of the latter is very likely to win the day. The IRS guidance only makes clear what was true: Bitcoin is not a new type of cash. Its advantages and drawbacks are distinct.
The IRS has also explained several different points. When an employer pays a worker in virtual money, that payment counts as wages for employment tax purposes. And if companies make payments worth $600 or more to independent contractors using bitcoin, the companies will have to file Forms 1099, just as they would if they paid the builders in cash.
Clearer rules may cause new administrative headaches for many bitcoin users, but they can ensure bitcoin’s future at a time when investors have good reason to be cautious.” [Bitcoin is] getting validity, which it did not have 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)
After all bitcoin users can recognize and agree on the kind of asset it’s, that result is likelier.
A minority of bitcoin users watched its former unregulated status as a feature, not a drawback. A number of them oppose government supervision for ideological reasons, while some discovered bitcoin a helpful means to conduct illicit enterprise. But as the recent collapse of notable bitcoin exchange Mt. Gox demonstrated, unregulated bitcoin exchange may cause catastrophic losses without a safety net. Some users may have believed they were protecting themselves by visiting bitcoin to escape the heavily regulated banking sector, but no regulation at all is not the answer either.
The IRS is right when it states that bitcoin ought to be treated as property. This certainty can secure the future of an asset which, while it makes bad currency, might be useful to those who wish to maintain it as land for speculative or business factors.