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

Under Notice 2014-21, the IRS claims capital gains and losses will depend on whether a "virtual currency is a capital asset in the hands of a taxpayer." Yet since there is no way for consumers to earmark their Bitcoin wallets as "non-capital" accounts, this really means that if Bitcoin is held in a wallet for any time period, it can be viewed as an investment like a stock or bond. This would mean that almost every time Joe used Bitcoin to purchase something as small as a cup of coffee at his trendy urban coffee shop, he would realize a gain or loss. For long-term holders like Joe, who had experienced a 10- or 100-fold increase in their bitcoins' value, they might incur a 30-cent capital-gain tax on their daily $2 cup of coffee.

This is the real tax-reporting boondoggle, which could threaten widespread consumer adoption of Bitcoin. There is no exemption for "de minimis" property gains or losses as there is with foreign currencies. So while Joe can buy euros for a trip to Paris, and then cash them out at a 5% gain during his return voyage, he doesn't need to worry about reporting a dime of that gain until he's hit $200 in total gains. On the other hand, according to IRS property rules, Joe should be ready to record a 30-cent capital gain and aggregate his records (via Form 1099-B) for every single cup of coffee he buys.

The complexity quickly begins to spiral out of control from there. What happens when he is settling up with his friends to pay the bar tab? Is Joe able to select which specific wallets he uses for his coffee purchases so that it's easier for him to separate his trading gains and his consumption? Would it be considered a wash sale if Joe bought more bitcoins after spending all of his assets on patio furniture at Overstock (Nasdaq:OSTK) and stocking stuffers at Gyft (both of which accept Bitcoin as payment)?

Some have suggested it is unlikely that the IRS has the resources to enforce these new policies, and that the guidelines are not intended to penalize "consumers." Indeed, even Keith Aqui, author of the IRS notice, suggested to the Wall Street Journal that the agency merely meant to discourage tax evasion on large purchases. Exempting de minimis Bitcoin transactions from reporting would limit onerous and unnecessary tax-reporting requirements, while still preserving the IRS's ability to collect taxes from larger Bitcoin investors who have been buying cars and condos with their investment gains. But that would also take an act of Congress, not an IRS clarification. So don't hold your breath.

Still, the fact remains that anyone who holds Bitcoin for any length of time can be considered an investor under the IRS guidelines. Consequently, the guidance appears to promote Bitcoin's use by consumers who use "instant conversion" tools that buy bitcoins at the moment they are needed for a transaction (e.g. international remittance) rather than those who hold Bitcoin in a checking-account style wallet. These "instant buy" tools might be the consumer complement to widely available merchant solutions, which allow businesses to instantly convert Bitcoin purchases to U.S. dollars.

Many consumer advocates, including the Tax Foundation, have called the guidance "inappropriate" with respect to reporting requirements, and some believe that this will dissuade many from using virtual currency altogether. But if there is a chance that the purchasing power in Joe's Bitcoin "checking account" doubles next year, will he really mind paying taxes on those gains? If reporting (and perhaps withholding) software materializes to seamlessly track his spending and transactions, maybe not.


Bitcoin Tax Guide: Donations
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