The saga of bitcoin’s existential crisis continues, with a new announcement from the Internal Revenue Service that the cryptocurrency will not have status as legal tender in any jurisdiction in the US.
In other words, bitcoin and other cryptocurrencies will be treated as property, not currency for federal tax purposes.
The ruling could be a death knell for the elusive Satoshi Nakamoto’s digital currency. Anyone who wants to buy a beer for bitcoin will have to make rigourous records and pay capital gains tax to do so.
Since the announcement yesterday, the value of bitcoin has dropped 8.44%. However, the question of how the IRS will enforce its new ruling on anonymous bitcoin wallets is yet to be seen.
What the IRS ruling means
This ruling could have significant ramifications on bitcoin trade. If HMRC and other tax authorities make similar judgements on bitcoin
1. Everytime a bitcoin transaction is made, you’ll have to calculate your gain or loss and record it. This would not be the case if bitcoin was a currency.
2. Bitcoin miners will have to pay a tax on the bitcoin they mined. This will be based on the value of bitcoin on the day that it was mined. Mining expenses – like cost of electricity and depreciation can be deducted.
3. Bitcoin miners may be subject to a further tax if the IRS decides their activities constitute a business. But this is still a grey area.
4. The IRS will apply these rules to past tax years as well as the current one.
No need to panic
Though the IRS’ ruling is a landmark ruling, it’s not really something we didn’t expect.
A relatively small number of businesses accept bitcoin in exchange for services.In fact, most people involved in bitcoin trading treat it much the same as the IRS – as a stock, not a currency.
When eToro started trading bitcoin, for example, the social investment network listed it as a stock rather than a currency.
Though the IRS’ ruling is nothing unexpected, it shows that governments have taken note of the potential that bitcoin trade could have to fill up their coffers.