What the IRS Ruling Means for Bitcoin Category Commodities

 

Rodney Johnson | Thursday, March 27, 2014 >>

It only exists in digital form, as a saved piece of software, like a computer file.

It can’t be lost, destroyed, or stolen in physical form.

Transferring it can only happen between computers, typically over the Internet (due to verification requirements).

It’s not controlled by any government, so there’s no need to worry that a political entity will use the currency for its own goals, like propping up a weak economy. Nor can any government debauch, devalue, and destroy it.

There’s a strict limitation on how many can be created, which means runaway inflation through excessive printing shouldn’t occur.

It operates free of impediment… it can be traded and transferred without attachment by any governing body.

Perhaps the most attractive thing about it is the anonymity it provides. Prying eyes and greedy hands can’t see or touch it.

It is all of these fabulous attributes, and then some, that attract so many to the digital currency, bitcoin.

At least until now, that is…

The IRS has found a way to rub the shine right off bitcoin.

Without fanfare, the taxing authority issued guidance on bitcoin yesterday, March 26. Per the IRS, the software is not a currency. It is simply property, and all the rules of property apply.

So simple, yet far-reaching.

As property, any increase in bitcoin value holders realize through subsequent trade is taxable as a capital gain.

Conversely, any loss they realize through trade can be used to lower a tax bill.

To explain, the IRS offered the following example…

If you buy $1 worth of bitcoin, which you later trade for a $2 cup of coffee (thanks to the “software” appreciating in value), you’ve made a $1 gain and you must include that in your tax calculation.

This situation snowballs the further you take the example. For people in states that calculate income tax, bitcoin transactions will be included there as well. And when a vendor receives more than $600 worth of bitcoin from any one person, the vendor must report it on its own tax filing.

While nothing in this ruling dents the ease of transfer of bitcoin, or makes it more likely to suffer from inflation, it certainly kills the notion of acting anonymously, away from the prying eyes and potentially greedy hands of others.

With bitcoin transactions now clearly subject to the long arm of the U.S. taxing authority, many users will probably determine that using the virtual currency in barter trade is simply an additional step without much benefit.

For those who have already used bitcoin, and benefited from its run up in value, make sure to include that on your tax return in April. And of course, include payment in U.S. dollars. The IRS specifically noted that bitcoin, which is not a currency, can’t be used to settle your U.S. debts, such as taxes.


Rodney

P.S. Harry is holding a live Twitter event on April 8, from 4 p.m. to 4:45 p.m. During this time, he will answer any questions you have regarding his latest book, The Demographic Cliff. Make a note of this on your calendar, write down your questions, and then on the 8, use #democliff to ask what you want @harrydentjr.

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Categories: Currencies

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.

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