Bitcoin's Futile Quest to Be a Currency

By Lawrence Parks

Bitcoin is a fascinating and ingenious technology, but most promoters are mindful of neither the monetary nor the tax issues. For all practical purposes IRS regulations issued in March preclude bitcoins from being used as an alternative currency.

The IRS treats bitcoins as property. The result is that bitcoin transactions trigger a taxable event. Buyers incur a tax liability for the difference in dollars between what they paid for a bitcoin when they acquired it and the dollar value attributed to the bitcoin when they spend it. Sellers of course are subject to a tax based on the dollar value of the bitcoins they receive for a good or service.

To comply with these tax regulations, buyers and sellers must log all bitcoin transactions and report them at tax time. For transactions that require future payment, buyers and sellers undertake an exchange-rate risk involving the dollar value of bitcoins. This will greatly reduce, or perhaps eliminate entirely, using bitcoins for settling future payments, which is the principal use of money.

Some bitcoin zealots reject the effect of triggering taxable events on the theory that bitcoin transactions are anonymous. That is arguable. What is not arguable is that one who doesn't report a taxable bitcoin gain is guilty of tax fraud, which is a felony.

In other words, the future of bitcoins depends on users willing to log all transactions, report them at tax time, and pay a tax or to engage in tax fraud. As soon as one of them ends up in prison, that will be the end of it.

Read the rest here.

RW note: The government clamp down IS coming as well as a new round of Bitcoin-related arrests that will nab some big names. I am not in favor of these arrests, but they are the nature of the government beast. Bitcoin fanboys who think they are immune to government aggression are terribly mistaken.