This week the IRS finally gave Bitcoin a label. While Bitcoin is commonly thought of as a currency / financial instrument, the IRS has labeled Bitcoin as PROPERTY for tax purposes. Their rationale: even though Bitcoin is used as a currency, it has yet to be accepted by any country as a currency. Thus, Bitcoin is more like personal intangible property. So when people receive bitcoin as payment for their services, they must include the fair market value of the currency at the time of the transaction when computing their income for their taxes.
This represents good news for the Bitcoin community. If Bitcoin has become significant enough to tax, it represents a good step in the maturation process for the fledgling technology.
But, this news is not all sunshine and rainbows. There are a couple of problems with this. First, libertarian values seep in the core of Bitcoin. Bitcoin was created to be a peer-to-peer currency without intrusion by third parties. By the IRS taxing each exchange between a seller and buyer, this incentivizes Bitcoin users to hoard instead of using them. Second, it makes Bitcoin less attractive as the means of exchange between a buyer and seller so long as its taxable. Especially when determining that tax may become extremely difficult with Bitcoin constant flux in price.
Taking a longer view of this news, it could spell bigger problems. Whenever Bitcoin is used in a contract between individuals, it needs to be a “trade” instead of a “sale.” This reasoning more closely aligns with securities. Not only does this label undercut FinCen’s monitor on Bitcoin as a cryptocurrency, it also gives credibility to the SEC’s inquiry on the legality of Bitcoin exchanges.
Although Bitcoin’s community invites legal clarifications, SEC regulation would kill Bitcoin’s growth in the market. If viewed as a mere transferable commodity like a stock or bond, then every company dealing with Bitcoin would have to comply with SEC regulation, which is not a cheap thing to do. More on this later.