New IRS Bitcoin Rules Pose a Problem Only an Army of Startups Can Solve
- 03.25.14
- 6:42 PM
- (Updated by ENDAH)
Photo: Ariel Zambelich/WIRED
On Tuesday the Internal Revenue Service finally said what it thinks of Bitcoin, and on first blush, it looks like it could cause hassles for some bitcoin owners.
Bitcoin, the IRS says, is property, not a currency. And as such, when you buy something with the volatile digital currency it’s most likely a taxable event. The rule is spelled out in question #6 in this handy Q&A document (pdf) published by the IRS today.
Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for
other property?
A-6: Yes. If the fair market value of property received in exchange for virtual currency
exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable
gain. The taxpayer has a loss if the fair market value of the property received is less
than the adjusted basis of the virtual currency.
other property?
A-6: Yes. If the fair market value of property received in exchange for virtual currency
exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable
gain. The taxpayer has a loss if the fair market value of the property received is less
than the adjusted basis of the virtual currency.
So under the IRS’s rules, if you bought a bitcoin for $10, and then used it to buy a 1 BTC television when bitcoin was trading at $600, you need to pay a capital gain tax on the $590 difference. In other words, you now need to keep track of the value of bitcoins, in U.S. dollars, both when you acquire them and when you spend them, and report the difference on your taxes.
That sounds like a bookkeeping nightmare, but as with so many of the twists and turns that face bitcoin as it matures as a digital currency (er, property) it’s also an area where new bitcoin startups could step in.
“I think this is going to create a huge opportunity for hosted wallets,” says Jered Kenna, a bitcoin entrepreneur and the CEO of Moneyandtech.com. He believes that the smart bitcoin wallet makers will simply be able to add this as a service, tracking the capital gains and losses as you spend your bitcoins through the year, and maybe even issuing you a convenient 1099 at the end of the year.
Of course, bitcoin by its very nature can make it hard for the IRS to keep tabs on who is moving bitcoins. It’s pretty easy to create a bitcoin address all by yourself, and that makes it tough for the taxman to figure out which bitcoin addresses belong to U.S. citizens.
On the other hand, once your address is identified, everything you do on bitcoin’s public ledger — called the blockchain — can be tracked and linked to other bitcoin addresses. Which is kind of how they got Capone.
Robert McMillan is a writer with Wired Enterprise. Got a tip? Send him an email at: robert_mcmillan [at] wired.com.
Follow @bobmcmillan on Twitter.
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