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IRS Decides How to Tax Bitcoin As The Cryptocurrency Falls To Lowest Levels of 2014


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IRS Taxes Regarding Bitcoin

IRS tax bitcoinOn March 25, 2014 the U.S. government issued some statements regarding how to tax Bitcoin and other cryptocurrencies. In a statement the IRS said Bitcoin would be treated as income or personal gains depending on the situation. Since Bitcoin (and other virtural currencies) can be used to pay for goods and services it would be treated as income in those situations. However, if an investor purchases Bitcoin (and gains or loses on the investment) the tax would be treated as personal gains/losses.

The IRS understands that the “currency” behaves like normal money, but it does not have any legal tender status in any jurisdiction, which has caused them to treat the currency more like an investment or payment of goods and services. “In some environments, virtual currency operates like “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but it does not have legal tender status in any jurisdiction.” (www.irs.gov/)

And with that announcement it may be time to start referring to the coins as property instead of currency.

How The Coins Will Be Taxed

capital gains tax
∙Any employees paid with Bitcoins (or other cryptocurrencies) must report it on a W-2 form. Just like normal wages this will be subject to federal income tax.
∙Payments to contracts are taxable under self-employment tax rules.
∙A payment of Bitcoins is subject to information reporting to the same extent as any other property.
∙A gain/loss from investment in the coin will be treated as a capital asset.
∙Bitcoin miners must calculate fair market value when mining coin to file the appropriate taxes.

For more information and finer tax stipulations please refer to Notice 2014-21 released by the IRS.

Whats Next For Bitcoin?

The IRS taking interest in Bitcoins is certainly favorable for the currency in the long-run even if for the time being it may seem unfavorable. Also, miners will also be under more scrutiny as the IRS has openly stated they must report the gains they have made just as any other mining business would. This will definitely slow down mining as it increases the barriers to entry (which are already becoming very high) due to the degree of difficulty and specialized equipment miners need to generate coins.

mt gox fallsCurrently, we are still in the midst of a huge market adjustment from the failings at Mt. Gox a Tokyo based exchange. This is not the first time the currency has been under fire in its brief existence. Many scrutinize the coin due to lack of regulation, but proponents of the coin state that is one of the most desirable traits about the coins. It is tough to say whether the latest announcement by the IRS are fueling even further losses of market capitalization or not.

There are still many questions left to be answered about Bitcoin as a whole. Such as will it ever be entirely safe? I think the answer to that is tougher than a simple yes or no. Let me elaborate.

First off no currencies are 100% safe. The U.S. Dollar can be stolen in large quantities as well. There could also be counterfeit bills put into circulation (think North Vietnam flooding the U.S. with counterfeit money). It is pretty much a given that whenever there is money at stake (especially sizable amounts) there will always be that group of people that are going to try and exploit the current security measures. This is more a fact of life than it is a fact of Bitcoin. So in short is the currency ever going to be 100% safe? I’d have to answer no.

That isn’t the main problem though at the time being. With current money supplies we are talking about individuals needing to protect themselves. The reason why the Mt. Gox failings are such a big deal (and it is not the first time this has happened) is due to the fact that the hackers were able to make false transactions that were put in place of the real counterpart. This is really scary business for anyone holding coins because your money could be taken and you wouldn’t even necessarily know about it. This is what happened to Mt. Gox they didn’t realize the money was missing until it was already too late.

If the hackers could do this over the entirety of the coin the whole currency could theoretically disappear overtime. This coupled with the fact that there is no regulation on the currency has made it a very risky investment.

While there are some major drawbacks to Bitcoin right now there is also unlimited potential (although potential doesn’t always materialize). There are still a lot of questions to be answered about the security of the coin. There is no doubt about that. This is the second major hacking that has occurred to the coin over its lifespan. The first brought the coin down to pennies. This was back when not many people knew what Bitcoin was.

future of bitcoinEven with all the questions about the current stability and security of the coin there is plenty of upside. In fact, the major exchanges that are now in place are much more reliable then Mt. Gox ever was. Many of the Original Bitcoin miners and important people within the community also stayed away from Mt. Gox because they didn’t believe in Mark Karpeles and knew he was in way over his head. For those of you who don’t know the story Mt. Gox was formerly a trading card website where people could buy and sell Magic The Gathering Cards. The person behind it was not a “business man” or an “investor” in the traditional sense of the word. Other exchanges immediately addressed the Bitcoin community during the time when Mt. Gox was starting to spiral out of control. They immediately cast Mark Karpeles out and made it publicly known that he was not the proper person to be running an exchange.

Personally, I’m still a big believer in Bitcoin. For everything negative about the coin there are 100 good things. When I get to 90 years old will Bitcoin be the most widely used coin in the world? That is tough to say, but I do know that it will not be the U.S. dollar – unless the U.S. dollar has a major overhaul and is updated. Cryptocurrencies are the way of the future. We have to remember that with anything new their are going to be some major tests and failings. However, the theoretically uses and possibilities for the coin are way to great and far surpass anything else that is currently available. As the world comes more connected with information and more people do business international this type of currency is going to become more important. Even if Bitcoin is not the particular winner that stands when I am old it will be a something of a similar nature.

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