This article assumes that Bitcoins will primarily be a passive asset, but converted back into USD (or other regular currency) for usage. If Bitcoin becomes popular, that won't be the case - Bitcoins will be bartered directly for products and services. So I think the article rather describes step 2 and 3, with step 1 being "Bitcoin fails to become popular".
You can't pay income taxes with bitcoins. If you make income in bitcoins, if you are an American at least, you will need to pay taxes on that income. In this way, bitcoins cannot replace the dollar for American citizens. The most it can ever do is be a stable exchange currency.
This is probably not a big deal for silk road, but what exactly is the rules for paying income tax made with a foreign currency, outside of the country? Do you have to pay before you bring the money back to the US, or only after? At what rate of exchange?
The US has "world tax" which means they can tax their citizens all over the world (no matter what currency). It's not even limited to citizens, it actually extends to anyone who's living in the US for the majority of the year.
That is exactly the kind of thinking that will potentially get us into this trouble in the first place. If you have an income you pay taxes on it, end of story. If you think some income is exempt just because it's a little harder to trace and don't declare it, you are committing tax evasion.
If you want to model your BitCoin transaction as a barter transaction, the IRS probably won't mind too much. (I'm not promising the degree to which they mind will be zero, but it'll certainly be substantially less than if you give them no money.) Either way, they're going to want and get taxes based on a fair market value. And if you don't pay them, either way, you're going to be in trouble if they find you.
They're a lot more difficult to confuse on the basic matter of "does the IRS get some money out of this transaction" than some people seem to think.
> "you must immediately translate into dollars all items of income, expense, etc. (including taxes), that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Use the exchange rate prevailing when you receive, pay, or accrue the item."
This is fairly straightforward -- if you get paid in EUR, you have to use the exchange rate from when you get paid and declare your income in equivalent USD. Given that bitcoin calls itself a currency, I would expect the IRS to treat it the same way.
Erh, everything (ok, most things) has a dollar value, especially bitcoins whose USD value is constantly tracked by numerous exchanges. It's slightly harder for the IRS but not as hard as finding out about your Swiss bank account. As long as you don't report income you're simply conducting tax evasion.