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

As if the bitcoin tax situation weren’t complex enough, there’s at least one more interesting feature of digital currencies because of their status as property. This is the concept of “wash sales,” situations in which a taxpayer sells off an investment, realizing a tax loss, and then immediately buys it back at a bargain price. Wash sales typically apply to stocks and securities, o it’s unclear exactly how it will impact bitcoin and other digital currency traders in the years to come. Because bitcoin is not considered a stock or security, the IRS would likely only go after investors for “non-economic substance” transactions which cover broader property rules. The fact is, most traders make investment decisions in bitcoin and other digital currencies because of market-moving news and based on the wide swings in price levels of these currencies, not for tax purposes. Because of that, it is unlikely that bitcoin traders would be penalized by the U.S. government under these rules.


Should the IRS eventually close off the wash sales loophole, which would potentially have implications for a bitcoin investor. He or she would need to wait at least 30 days before buying more bitcoins in order to realize a loss on another sale of his holdings. Depending upon the exchange and the wallet that our sample investor makes use of, the IRS will probably be able to catch him if he tries to claim improper losses on wash sales.


More likely, though, and given the global, decentralized nature of digital currencies and their exchanges, it would be very difficult for the IRS to flag him for under-reporting on wash sales. This doesn’t even take into account “cold storage,” referring to safety deposit boxes or offshore accounts that are fully offline; these are essentially impossible to track given the way that the blockchain system is set up. Thus, if an investor could “be his own bank,” tax evasion might be an easier (although illegal) prospect.


The implications of bitcoin investments in taxation are difficult to process, but this is just the beginning. Next, we’ll consider how different types of purchases and sales can be considered “taxable events” under the IRS classification of digital currencies.

Bitcoin Tax Guide: E-commerce Taxation
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