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

Related Articles
  1. Small Business

    How To Trade Forex With Bitcoin (XOM, EXPE)

    We look at ways to trade forex with bitcoin and the pitfalls in doing so.
  2. Small Business

    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.
  3. Small Business

    Bitcoin ETFs: How Do They Work?

    ETFs offer a cost-effective, safe and hassle-free way to invest and trade bitcoins as stocks, without worrying about the security of digital wallets.
  4. Small Business

    Bitcoin Innovations And Obstacles

    Investopedia explains the development of the Bitcoin digital currency system and the risks associated with using and investing in it.
  5. Small Business

    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.
  6. Small Business

    Ways To Earn Bitcoins

    There are many ways to earn and own Bitcoins other than just buying them on a Bitcoin exchange.
  7. Small Business

    Countries Where Bitcoin Is Legal & Illegal (DISH, OTSK)

    Although bitcoin has been in existence for five years, most countries still do not have consistent laws regulating the cryptocurrency. However, a few countries have banned bitcoin altogether.
  8. Small Business

    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.
  9. Small Business

    The Rise And Fall And Rise Of Bitcoin

    A look at the reasons behind the recent spectacular surge in bitcoin prices.
  10. Small Business

    5 Types Of Bitcoin Early Adopters, Part 2: Merchants

    Once the bitcoin novelty wears off, which types of merchants are most likely to realize the biggest long-term benefits from accepting this digital currency?
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center