Image credit/info link here. (Note: this links to a Bloomberg summary/background on Bitcoin for people like me who are fascinated by Bitcoin but find the concept very hard to grasp. I strongly suggest you read this prior to commenting.)
This week, it was announced that Bitcoins would not be treated as property for taxing purposes. The Internal Revenue Sercice (IRS) will apply the rules that currently regulate stocks and barter transactions to Bitcoins. This marks the first substantive ruling from the IRS concerning Bitcoins. According to a Bloomberg report, this could reduce the volume of transactions conducted using Bitcoins. Charles Allen, the chief executive officer of BitcoinShop Inc., released a statement following the IRS's announcement. He commented, "“The implications this decision will have on the Bitcoin ecosystem are far reaching, and will be burdensome for both individual users of Bitcoins, Bitcoin-focused business and for the general adoption of virtual currencies."
According to the same Bloomberg article mentioned in the previous paragraph, Bitcoin investors will now be treated like stock investors. For example, if a Bitcoin is held for more than a year and is then sold, it will be taxed at the lower rate applicable to capital gains. The United States also allows investors with losses to subtract capital losses from any capital gains.
Zooming out from the Bitcoin tax issue, it's also interesting to consider the opinions of some well-known, trusted experts. A couple of months ago, U.S. Federal Reserve chairman Ben Bernanke gave his "cautious blessing" to Bitcoin in a letter to the Congress. On the other hand, American investor Warren Buffett, also known as one of the wealthiest men on Earth, opposes Bitcoin, calling it a "mirage" that is best avoided. (You can also check out venture capitalist Marc Andreessen's criticism of Buffett and an address of those criticisms here.)
A couple of ideas to consider:
- Given what we have learned about taxes, do you think the IRS is wise to categorize Bitcoins as property, not currency? What are potential pros and cons of this?
- Bitcoin doesn't have a central bank. In what ways does this liberate the Bitcoin system?
- What is your take on Ben Bernanke's "cautious blessing"? What is your take on Buffett's "mirage" statement?
Additional Christian Science Monitor link
Want to test your Bitcoin knowledge? Take this quiz by the Christian Science Monitor.
3 comments:
The funny thing is, currency is more or less property. The idea of currency came out of the need for a standardized trading system where people would be willing to trade even when they didn't necessarily need something, and it would allow for trades to occur on more perishable goods on a more regular basis.
In this way, Bitcoins are currency; they're used for transactions, have little or no value themselves, but are accepted by numerous parties (although it's nowhere near ubiquitous right now). The IRS' decision doesn't make it a non-currency in its use, as much as its legal status. At the same time, the Bitcoin is founded on the idea of low-to-no centrality; each person can "mine" his or her own bitcoins, very similar to the way people produce property (not currency).
The entire concept of the Bitcoin treads the line finely between currency and property, but its liquid nature seems to suggest currency status over property. At the same time though, it means its no longer considered a "monetary instrument", among other things, and offers a safe tax haven for people (paid in Bitcoins instead of dollars, sold them a year later at 15% tax instead of 38%). It'll be an interesting development either way for the financial world as we watch the success (or lack thereof) of the Bitcoin.
Nathan hits all the major points of this discussion.
I always considered Bitcoin as a currency, so it will be interesting to see how its taxation effects the operation. Obviously as a decentralized, cooperative system, being taxed is not in Bitcoin's favor; however, it is a better alternative than Bitcoin being shut down all together. It can be seen as something that may legitimize the program in the eyes of the publlic.
I can't pretend to be an expert (I did not do well on that quiz Annika posted :P), but won't this negatively affect the way that Bitcoins are used internationally. Since many were "wiring" money between countries using Bitcoin, with no exchange rate, will the IRS's decision have an impact? I'm not sure how it would, but I suspect something will change.
With this move it seems many are fearing a future (perhaps one that's very far off) where Bitcoin is no longer run in its current state but is more centralized and loses its uniqueness of having a public ledger...now I think this is a bit cynical and unlikely since the system inherently disallows behavior that would allow one entity to regulate (those who have tried, failed), but I suppose when the IRS gets involved it's impossible not to react and hypothesize.
Nathan, I'm interested as to what you mean by "produce property." See, I don't think that is a trait of currency in our country--people don't "produce" currency. In fact, very few people themselves are "producing" any sort of property.
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