
Bitcoin Slips In The Wake Of The IRS’s Tax Decision - kaa2102
http://techcrunch.com/2014/03/30/bitcoin-slips-in-the-wake-of-the-irss-tax-decision/
======
FatalLogic
The article is interesting, but the writer's main point seems to be lacking
much evidence. The normally volatile Bitcoin price actually remained flat for
days after the IRS announcement - because it wasn't a surprise.

The article briefly mentions a much more plausible reason for the sizable
price drop, which occurred later: China cracking down on bank to exchange
deposits. The writer just sort of handwaves it away.

There's no evidence that the IRS ruling pushed the price down, in fact there's
plenty of evidence that it did not: the fact that the price did not move.

Meanwhile, there's plenty of evidence that China's action did affect the
price. As soon as rumors began to spread, trades on the Chinese exchanges were
happening at prices far below those on outside exchanges.

The Chinese exchanges led the market down every step of the way. (Naturally a
price fall in China soon began to pull down prices everywhere, due to
arbitrage, and an understanding that the probable withdrawal of Chinese money
was very bad news for anyone speculating on the short term price).

Chart showing price remaining flat for 2 days following the IRS announcement
on 3/25, and then falling sharply on firm news from China (Caixin report
3/27):
[http://bitcoincharts.com/charts/bitstampUSD#rg60zczsg2014-03...](http://bitcoincharts.com/charts/bitstampUSD#rg60zczsg2014-03-25zeg2014-04-01ztgSzm1g10zm2g25zv)

~~~
danieltillett
I tend to agree with you on the immediate cause of the fall, but I do think
the friction that will result from the IRS decision really damages the value
of Bitcoin as a low transaction cost mean of exchange.

~~~
FatalLogic
>I do think the friction that will result from the IRS decision really damages
the value of Bitcoin as a low transaction cost mean of exchange

It doesn't seem to make much difference. In its current form, Bitcoin already
suffers from a lot of friction when used as a means of exchange. For the
average consumer, buying it is difficult, storing it is difficult, the value
isn't stable, using it for physical retail purchases can be very clunky.

It's a beta. A lot of things would need to work better for it to really
succeed. In that context, the rather clumsy reporting requirements of the IRS
ruling are yet another minor speedbump, which needs to be either ironed out or
worked around.

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beachriot
I am pretty surprised that the price of BTC fell after the IRS issued
guidance. Like asperous mentioned, most people with tax knowledge (myself
included) expected Bitcoin to be taxed this way, and this is what we were
hoping for. The author discusses how people now have to "decide whether to
report the income and pay steep capital gains tax, or submit fraudulent tax
returns." But the thing is, we knew all along that tax would have to be paid.
It was simply a matter of whether it was taxed at higher ordinary income
rates, or lower capital gains rates.

~~~
panabee
do you mind elaborating why you hoped for this tax ruling? currency seems like
bitcoin's most powerful application, but this ruling cripples its currency
applications -- not because of documentation purposes (since wallets can
easily record tax data), but because now each transaction contains a potential
bitcoin capital gains cost. in other words, buying a camera for $200 might
cost more than $200 because of capital gains. unless the price of bitcoin
completely stabilizes, doesn't this ruling hurt bitcoin as a currency?

~~~
beachriot
let's say that i purchase a bitcoin for $150. this is my cost basis. the next
day, the bitcoin appreciates in value to $200. i use this single bitcoin to
purchase a $200 camera. in this transaction, i have spent $200, but i only
paid $150 for it. this means that i have essentially received $50 for free.
the IRS wants to tax this "free" income. under IRS guidance, this additional
$50 that you got "for free" is taxed at a capital gains rate (which is up to
20%). if the IRS had declared bitcoin a currency, this $50 in gain would be
taxed at ordinary income rates (which is up to 39.6%). since we'd ideally like
to be taxed at a lower tax rate, we wouldn't want it to be considered a
currency for tax purposes because currency is taxed at the 39.6% rate.

it's also REALLY important to note that the way currency is defined in the tax
code is different than how currency is defined for other parts of government,
be it another arm for the treasury department (fincen for instance) or even
the SEC. so even though bitcoin is not considered a currency in the tax code
specifically, doesn't mean that it should be considered less of a currency. am
i just talking in circles now?

i hope this answers your question.

~~~
7Figures2Commas
> let's say that i purchase a bitcoin for $150. this is my cost basis. the
> next day, the bitcoin appreciates in value to $200. i use this single
> bitcoin to purchase a $200 camera. in this transaction, i have spent $200,
> but i only paid $150 for it. this means that i have essentially received $50
> for free. the IRS wants to tax this "free" income. under IRS guidance, this
> additional $50 that you got "for free" is taxed at a capital gains rate
> (which is up to 20%).

There's one huge problem with your example: you have a short-term capital
gain, not a long-term capital gain. Short-term capital gains are taxed at the
same rate as your ordinary income.

~~~
beachriot
yes, i am aware of the holding period necessary to be able to use capital
gains rate. i left it out merely to simplify the example for non-tax folk.

but if you understand tax, then instead of, "the next day," my example should
say, "a year and a day later."

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neilk
Tangential question: could this, paradoxically, make Bitcoin a better medium
of exchange, even if it becomes a bad speculative investment?

Since the IRS is now imposing a capital gains tax, that penalizes speculators.
One of the issues with Bitcoin right now is that so many people are
speculating (myself included) that it probably increases the volatility. If
people are encouraged to spend, invest, or convert BTC into fiat currency
ASAP, the price of a BTC should go down and remain very stable. In this
scenario BTC becomes a decentralized money transfer network, for the most
part.

The only issue is going to be doing all the accounting for the government, but
that seems eminently doable since every transaction is perfectly recorded.

I'm not very experienced with financial matters, so perhaps someone can
correct me.

~~~
battani
The IRS now treats bitcoin as a property asset, very much the same way they
treat stocks, and not all stocks are prone to speculation. So this is expected
news for those who hold bitcoin as an investment.

The major impact of this decision will be on consumer adoption. Now, every
time I want to make a transaction, I need to keep track of my taxes. I know
that some wallet services are already developing ways to keep track of this
automatically, but that's just an extra headache for the average consumer.
This in essence will force consumers to think of bitcoin more as an
investment, rather than a "currency" they can spend, and that will impede
adoption.

I know nobody here likes to hear it, and I feel like a lot here in SV are
tuning this out, but bitcoin is really, really struggling to find a relevant
use case with consumers. Regular consumers have absolutely no reason to use
bitcoin. The "1-click" payment and 1% price discount are not appealing enough
to the average Joe who already gets 1-2% cash back, airline miles, and
consumer protection on his credit card (and 1-click checkouts on many
e-commerce platforms). And more regulation isn't helping the "crypto-
anarchist" decentralization angle either. Add price volatility to that and it
kills the consumer use case.

But... micro-payments? Consumers have always hated them.
[http://www.openp2p.com/pub/a/p2p/2000/12/19/micropayments.ht...](http://www.openp2p.com/pub/a/p2p/2000/12/19/micropayments.html)
(Shirky, 2000)

But... international transactions? Hard to beat the fees at
[https://transferwise.com](https://transferwise.com).

Bitcoin is great, FOR MERCHANTS. But consumer adoption is going to determine
whether or not it succeeds on a grander scale. Unfortunately, Bitcoin does not
solve a problem for consumers. Especially with tap-tap mobile payments around
the corner.

When it comes to money, consumers want to be insured and cuddled and protected
and not run the risk (however small) of being _criminally liable for
transactions_ and have someone to speak with if they make an erroneous
transaction or have their card stolen. And they can already do all that, which
makes it tremendously difficult to compel them to change the habits they've
had for in forever to adopt a system that does not provide them with
significant advantages.

I've been in bitcoin since 2011 and used to be a big believer, but I don't see
bitcoin gaining traction with consumers, in part because of the huge
regulatory risk. Any significant threat to the banks' business will be met
with harmful regulatory control (friendly reminder: Wall Street banks fund the
largest political lobbies in Washington). It could be destined to eternally
remain an investment instrument (like gold) or find very targeted applications
(like machine-to-machine payments). The underlying blockchain technology could
be of more use (if adopted by the banking system, for example) but that is
still far in the future.

~~~
fragsworth
> Unfortunately, Bitcoin does not solve a problem for consumers.

That's not true. It took a while to convince my friends, but now we normally
use bitcoin to settle restaurant bills and other debts that used to be
difficult to keep track of and error-prone. It's not a godsend from heaven,
but it works and is much better than what we used to do.

~~~
battani
Is there any reason in particular you're not using existing solutions, like
Venmo or Splitwise?

~~~
fragsworth
I don't know, those services are probably good, but Bitcoin works perfectly
and we don't mind the volatility, and I kind of enjoy it.

There are plenty of minor reasons to prefer Bitcoin, like how nobody can
prevent you from accessing your funds for something like "suspicious
activity".

But there are a some bigger reasons - if you're good with your security, you
don't have to do things like check another statement every month to see if
someone stole your account information.

------
danieltillett
This a huge accounting nightmare for businesses and individuals to deal with.
It is also likely to act as a precedence for other tax authorities. The real
value of bitcoin is in the low transaction friction (in theory more than
practice for most non-tech people). All this accounting is basically
undermining this.

------
sxp
Since the IRS has given a statement on BTC, people who had bought it last year
and sold near the peak for USD or products/services have now realized that
they owe a significant amount of taxes. So they now have to sell more BTC to
get enough cash to write a check to the IRS. Thus the supply of BTC will
increase and the price goes down.

The smarter thing would have been to sell the BTC and then put away X% in a
savings account (or a stable investment) with a plan to pay that money to the
IRS. Then the (100-X)% could be spent freely without issue.

~~~
dragontamer
Regardless of how the IRS was going to do things, you were going to owe
significant taxes anyway.

There were only two choices: Tax BTC as property, or Tax BTC as currency. In
both cases, you owe somewhere between 15% to 30% of your earnings to the IRS.

------
coin
I wish they'd depict the y-axis starting at 0 instead of 450, which makes the
decline seem worst than it is.

Also -1 for disabling zoom on mobile devices.

~~~
eCa
Here is the zero-based graph:

[http://www.coindesk.com/price/#2013-01-01,2014-03-31,close,b...](http://www.coindesk.com/price/#2013-01-01,2014-03-31,close,bpi,USD)

Edit: Or it would have been if the link worked.. But put the start date at
2013-jan-01.

------
mynameishere
The IRS's decision, if actually enforced, is going to make legitimate
transactions with bitcoin almost impossible. Filling out a 1099 is a pain in
the ass, even with relatively light trading, in which you might buy a block of
1000 shares at 55 dollars, and sell two blocks, one of 600 at 57.568 and
another 400 at 57.569. Try doing that with the fluctuations in currency
markets. If you buy 10,000 dollars worth of bitcoins, you'll need a new entry
for every time you spend them, with a different price for each.

And, if they enforce wash sale laws, you could be liable for totally innocent
trades. That probably won't happen though.

~~~
sliverstorm
You just need a 1099 for every transaction you make, how hard is that?

~~~
shakethemonkey
No, only those transactions over $600.

And you don't have to do it at all for payments tendered for merchandise, or
almost any payment to corporations.

[http://www.irs.gov/instructions/i1099msc/ar02.html](http://www.irs.gov/instructions/i1099msc/ar02.html)

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LoganCale
Not surprised. The accounting nightmare that results from this means I'm
basically done with cryptocurrencies. As a user trying to buy stuff with it I
have no interest in dealing with keeping track of every transaction for the
purposes of tax reporting, and neither is anyone else except for hardcore
supporters.

~~~
gst
> and neither is anyone else

who is living in the United States.

~~~
LoganCale
Or any other country adopting similar rules.

~~~
danieltillett
They all will soon enough :(

