Noteworthy Bitcoin News: Spring, 2014
A few weeks before tax day, the IRS gave guidance saying (that is, they declared that) Bitcoin is, was, and always has been a commodity in regards to tax burden. Capital gains tax applies each time a transaction is made with this
currency commodity (shall we call it a commurrency?), even if it is just a cup of coffee being purchased. If the price of Bitcoin was higher when you bought the Bitcoin than when you made the purchase, then you are liable to pay capital gains tax on that purchase. This is great for institutional investors, not so great for people in the U.S. who are using it as a currency. Personally, I wonder about the IRS’s capacity to enforce and act on this with the growing adoption of Bitcoin. Also, since the ruling is retroactive, all purchases/transactions made with Bitcoin since the beginning of time are fair game. So what if you don’t or can’t know the input and output values of all your coins (including other virtual currencies like Litecoin, Dogecoin, etc.) since 2009, when Bitcoin was released?
There is a clause apparently that says that if you can’t provide this information for some reason, or if you don’t have the records, then you *may* be forgiven of some of your burden for some of your gains if you appeal upon being audited for a given amount. Losses do deduct from total gains, just like you would expect, but I guess I just wonder how the IRS expects to keep track of Bitcoin transactions and audit people going forward. I know a number of people who bought their first Bitcoins through coinbase using a bank transfer. Like most people in this boat, you then transfer those coins to a safer-than-coinbase storage medium, whether that’s a paper wallet or the Bitcoin-Qt Standard Software Wallet which you run on your home computer (hopefully safely encrypted and backed-up — see my guide on doing this here). Each transaction made in order to get these coins under your control in this scenario is a transaction, but note: you haven’t purchased anything, or traded anything of value for your Bitcoins. Ultimately, essentially, all Bitcoin transactions whether purchases or personal fund-movements appear identical to the Bitcoin network. Were there some greater level of willing transparency on this issue from the IRS, we could know if they plan to, say, host their own bitcoin node, download the blockchain themselves just to make sure they understand it, or merely check transfers using an online blockchain (the public ledger), like blockchain.info, for example.
The final obstacle in collecting (and reporting) revenues from cryptocurrencies stems from high-frequency trading — say you bought your Bitcoin on a U.S. exchange, then transferred it to BTC-e in Bulgaria (where it’s counted as a virtual currency, incidentally…), then engaged in a bout of high-frequency Bitcoin/Litecoin/Dogecoin/Peercoin trading. The IRS doesn’t likely have legitimate access to these trades, nor may you have even a decently-complete record of what’s transpired; all you know now is you have more fill-in-the-blank-coins than when you started.
Another complication arises with the arrival (soon: May Day) of dark wallets and (next-gen) seamless coin mixing services. Dark Wallet by Defense Distributed is one such development which will be used to strip coins of their identifying information (i.e. where they came from first/middle/last). Anonymity in cryptocurrency will be possible (more possible than it is now). Add to this the facilitation of anonymous purchases through dark markets and distributed markets, such as BitWasp and DarkMarket (this also from Defense Distributed). Where the Silk Road was shut down, Silk Road 2.0, and others now exist. Add to this these 2 more new projects and project outwards: we are seeing exponential development and evolution in this economic space. Many more black, grey, and unrestricted markets will bloom — expect to hear more about this soon!
In other news, China is still wishy-washy about Bitcoin, but hasn’t outright banned it, and since some time has passed since the last definitely-going-to-be-banned rumors spread, the price has come back up a bit to around $500, from a low of approximately $350. Ultimately, the failure of Mt. Gox brought the value down by half in the early part of 2014, simply because so many people lost their money, and also because of all the FUD (fear, uncertainty, and doubt) spread about by the media; read: “Mt. Gox failed; Bitcoin’s dead!” Such proclamations will likely continue to be heard for a few years to come for a variety of reasons, but whatever happens in one country or region need not happen in another (I’m talking about legislation, FYI…). Finally, I will say I believe Bitcoin’s value will continue to rise as the technology is made more accessible through simple, non-smart phones, as more people learn how to send Bitcoins through SMS, and as more charities and families are able to receive donations and remittances throughout the world with near-0 friction, essentially for free at that.
Lastly, in the news: Sidechain innovation. I’m excited about this for Bitcoin and its future. Basically, instead of creating new alt-coins in the future, it may be possible to update the Bitcoin core to more easily extend Bitcoin into semi-temporary Sidechain-coins with different, varying properties based on people’s needs. Say you need a coin that transacts (or is confirmed) quicker — you simply create a sidechain, put some Bitcoin in escrow to initiate this, and create Side-Quick-Bit-Coins or whatever you wanna call them. Then when or if the need is gone, return the Bitcoins in escrow to the normal Bitcoin network. I’m fuzzy on the details, but stoked about the implications, particularly for Bitcoin’s ability to compete with Ethereum and other Bitcoin 2.0 protocols like Mastercoin and Colored Coins. The bottom line is new functionality and greater scalability with this.