Bitcoin’s IRS Troubles

March 31, 2014

The price of the virtual currency Bitcoin has fallen to about $461 from a closing price of $586 last Monday. This decline of about 21% came in the wake of an IRS ruling that net gains from Bitcoin transactions will be taxed as capital gains.

The IRS ruling made it substantially more difficult to use Bitcoin as a currency. Given that this is the use for which Bitcoin was designed, any threat to Bitcoin’s utility as a currency is a substantial threat to its value.

The main issue with the ruling may be the compliance costs. Imagine, for a moment, that you had to keep track of the value – in yen – of each individual dollar that you received, at the time you received it. Then, upon using the dollar, you had to record its value in yen at the time you purchased something. After doing this, you would compare the numbers, and report the gain or loss on your tax forms. It would turn any sort of economic activity into a bureaucratic ordeal. This is the sort of difficulty that Bitcoin users will be legally required to take on when they make transactions.

Since Bitcoin is virtual, it will be possible to design software that tracks this sort of thing for you. Nonetheless, this administrative burden throws a monkey wrench in the Bitcoin economy.

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