1. Bitcoin Tax Guide: An Introduction
  2. Bitcoin Tax Guide: Trading Gains And Losses - Fair Market Value
  3. Bitcoin Tax Guide: Trading Gains And Losses - Alt-Currencies
  4. Bitcoin Tax Guide: Trading Gains And Losses - LIFO, FIFO, Offsetting Lots
  5. Bitcoin Tax Guide: Trading Gains And Losses - Wash Sales: Impossible To Track?
  6. Bitcoin Tax Guide: E-commerce Taxation
  7. Bitcoin Tax Guide: Donations
  8. Bitcoin Tax Guide: Gifts And Tips
  9. Bitcoin Tax Guide: Lost Or Stolen Bitcoins

A final wrinkle that may be unique to Bitcoin due to its treatment as property has to do with "wash sales," in which a taxpayer sells an investment in order to realize a tax loss, only to buy it back immediately thereafter as a bargain. Today, wash sales only seem to apply to "stocks and securities," so Bitcoin traders may be off the hook for now. Since Bitcoin has not been labeled a stock or security (despite its liquidity and the fact that all bitcoins are "substantially identical" under the wash rule test), the IRS could only go after traders for "non-economic substance" transactions under broader property rules. These transactions are similar to wash sales, but given Bitcoin's volatility and the fact that most traders could argue that they made late 2013 trades in response to market-moving news (rather than tax motivations), it seems unlikely that traders could be penalized.

Let's assume, though, that the IRS closes this wash-sales loophole after the public-comment period this summer, or that an Act of Congress changes the law. According to Section 1091 of the tax code, a Bitcoin investor would have to wait at least 30 days before buying more bitcoins if he wanted to realize a loss on another sale of his bitcoins. If Joe keeps his assets in auditable exchanges and hosted wallets, the IRS will likely have the tools to catch him if he claims any improper losses on wash sales; trades within the same account at Bitstamp or Coinbase would likely be flagged in reports required by the IRS.

In reality, though, if Joe had a Bitstamp trading account (in Slovenia), and he transferred some of that money to a Coinbase wallet (in the U.S.) or over to BTC-e (a Bitcoin exchange based in Bulgaria), it would be extremely difficult to nab him for under-reporting wash sales. And if he were really sneaky, he could move assets into and out of personal wallets that may sit in "cold storage" (safety deposit boxes or offshore accounts), which would be nearly impossible to track without advanced blockchain analysis tools. In short, tax evasion would be relatively easy for Joe in an ecosystem where he could "be his own bank."

You can see how the IRS guidance could widen the gap between non-compliant black and gray market Bitcoin participants and the industry's more conformist newcomers.

Having fun yet? So far we've only touched on the trading complexities. Now we can dig into the really crazy stuff. What does it means to have a "taxable event" every time you buy a cup of coffee?


Bitcoin Tax Guide: E-commerce Taxation
Related Articles
  1. Tech

    Basics For Buying And Investing In Bitcoin

    Bitcoin continues to experience growth in both users and merchants, generating a common question - how can you be part of the action?
  2. Tech

    Benefits & Risks of Trading Forex with Bitcoin

    Want to trade forex using bitcoins? Don’t jump on the bandwagon until you compare the risks to the benefits.
  3. Tech

    The Rise And Fall And Rise Of Bitcoin

    A look at the reasons behind the recent spectacular surge in bitcoin prices.
  4. Tech

    The Strange New World Of The Bitcoin Exchange Futures Market

    We explain the basics of the Bitcoin exchange and futures market.
  5. Tech

    Ways To Earn Bitcoins

    There are many ways to earn and own Bitcoins other than just buying them on a Bitcoin exchange.
  6. Tech

    SEC Denies Winklevoss Bid to Launch Bitcoin ETFs in Surprise Upset

    The Bitcoin world was stunned by the SEC's decision not to approve the Winklevoss Bitcoin ETF.
  7. Tech

    Bitcoin Innovations And Obstacles

    Investopedia explains the development of the Bitcoin digital currency system and the risks associated with using and investing in it.
  8. Tech

    What Bitcoin Regulations Look Like Around The World

    Bitcoin is still so new that countries are struggling to make legislation catch up with technology. Some nations are more open to virtual currency than others.
  9. Tech

    If You Had Purchased $100 of Bitcoins in 2011

    Learn how an investment of $100 in bitcoin in 2011 would have performed over the years, and find out what your purchasing power would have been for each year.
Frequently Asked Questions
  1. What are Some Examples of Free Market Economies?

    Learn which of the world's economies best resemble free market economies, marked by free trade, low government involvement, ...
  2. Who Decides When to Print money in India?

    Find out the role of the Reserve Bank of India, or RBI, and the amount of authority given to the government. Learn who is ...
  3. What is the Difference Between a Forward Rate and a Spot Rate?

    Learn about spot and forward contracts, how spot and forward rates are used for spot and forward contracts, and the difference ...
  4. What are Some Examples of Stratified Random Sampling?

    Learn what simple random sampling and stratified random sampling are, some examples of stratified random samples, and how ...
Trading Center