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Weekly Bitcoin Recap: US Tax Rules Clarified as Prices Hold Above $500 on China Rumors

March 28, 2014 at 2:02 by BitcoinNews

Some long-awaited clarity on taxation finally arrived for U.S. bitcoin users as the the Internal Revenue Service (IRS) issued formal tax guidance addressing bitcoin specifically, but rumors about China’s position on the digital currency sent bitcoin prices plunging on Thursday.

Initially falling to just below $561 Thursday, according to the Coindesk Bitcoin Price Index (BPI), prices had a further brief dip to $473.90 before quickly rebounding back above the $500 level over the next few hours. That China would penalize banks or others transacting in bitcoin after April 15th appears nonetheless to be a totally unsubstantiated rumor at this point, though many sources have reported on it today as news.

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The IRS guidance comes several weeks ahead the April 2014 filing deadline, and as expected by many, including the Winklevoss brothers, the service chose to treat bitcoin as property, with profits taxed accordingly as capital gains. Merchants using third-party settlement organizations (TPSOs) like Bitpay and Coinbase could receive 1099-K forms. Miners would typically pay capital gains from the fair market value on the day bitcoin is acquired or “mined”, though some operating primarily in bitcoin sales might treat bitcoin as inventory subject to ordinary gains and losses. However, Coindesk found at least one miner with plans invest in a cloud-based mining service hosted in Europe to potentially simplify her tax situation.

Small-amount purchases might also just ignore changes in market value, as for buying an $8 sandwich; however, a $30,000 Harley is more likely a “material” purchase which should probably account for the tax basis of the bitcoin used. Bitcoin users shouldn’t treat this as tax advice, of course, and seek a qualified tax professional for that. Though many are please with the guidance, some have seen dire implications for bitcoin.

For example, the Atlantic argued that in one paragraph it could explain how the new tax rules would doom bitcoin by ruining its fungibility. The argument is not quite correct, as the tax consequences may cause users to value bitcoin differently, but that is the case with most assets. The value of that bitcoin on the open market still remains the fair market value for bitcoin. Furthermore, having clear and sensible guidance on bitcoin could only make it more attractive to anyone sitting on the fence waiting for tax guidance. It was just what the Winklevoss’s had been calling for, so it doesn’t seem to be at all unfavorable to bitcoin users of all stripes.

Probably a good guess is that those making large gains on the sale of bitcoin (or a large purchase of something with bitcoin) will do the math and report it. Many might find it easy to account for small transactions, but those handing it out as small gifts to friends or just buying lunch now and then would probably not bother with a complicated spreadsheet when the profit or loss on each line wouldn’t even amount to a dollar.

Though for tax purposes bitcoin may be considered property, it’s also not really an issue that in other contexts it may be considered a commodity, and for some states it may meet the legal definition of “money”.

In fact, the state of Washington has joined several others in defining bitcoin as “money”. Though the Washington State Department of Financial Institutions stresses that digital currency is a medium of exchange not authorized or adopted by any government, in Washington, digital currency is included in the definition of “Money”. Thus, the state requires companies that plan to have a business of transmitting money to its residents to check whether they need UMSA licensing before operating.

Money means a medium of exchange that is authorized or adopted by the United States or a foreign government or other recognized medium of exchange. “Money” includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more governments.

In addition to the Winklevoss’s planned bitcoin ETF, SecondMarket will open up its private bitcoin investment fund to ordinary investors later this year. That may hold appeal for investors intrigued by bitcoin but wary nonetheless of the “be your own bank” functionality. Given the explosion of information in the past year, much of it conflicting, this might actually be a surprisingly large group of people. The change is expected by the fourth quarter of 2014, as reported in the Wall Street Journal.

Other Coindesk articles in the past week focused on how bitcoin could be changing the world for the better, and regardless of the inevitable challenges, bitcoin appears to be here to stay. Coindesk admittedly has a lot riding on digital currency, but the European Central Bank (ECB) has also recently stated an opinion that bitcoin should not be ignored.

Bitcoin investors would tend to be pleased with increasing prices, but Coindesk wonders if $10,000 per bitcoin would be helpful or harmful to bitcoin. With the news and price appearing to have be tightly correlated in the the past, it would seem a move to $10,000 would be better. And regardless of continued volatility, few people at this stage rely on bitcoin as their sole currency.

There was also an excellent critique at the Coinsetter blog of the recent Goldman Sachs research report linked to in the prior post.

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