In the thick of tax season, on Mar 25 the Internal Revenue Service finally weighed in on the du jour speculative investment bitcoin, declaring the digital “currency” is not a currency at all, but rather a property, and is thus subject to capital gains taxes.
This classification is fairly close to the other major economic power’s definition of bitcoin. China famously outlawed bitcoin for financial transactions, saying it was not a real currency, calling it instead a “special virtual commodity” that its citizens could invest in at their own risk. Russia similarly dismissed bitcoin as currency, saying the ruble is the only currency of Russia and bitcoin is a speculative commodity, or “money substitute.” Sweden took the most unusual approach, classifying bitcoin as “electronic art,” and thus putting it into the same class as a painting, while reinforcing the idea that virtual money is not money at all, but property.
In the US, even bitcoin’s most ardent proponents realize that getting it classified as a currency is a fantasy. When filing with the SEC to set up the first bitcoin ETF, the Winklevoss Twins called bitcoin a “digital commodity,” to be treated like gold made of ones and zeroes.
All this adds up to an unfortunate trade-off. Despite its decentralized nature, Bitcoin is increasingly being rigidly defined by the major governments of the world. And that rigid definition puts it squarely in the realm of assets. Assets that, like a stock or a commodity or even a cellar full of fine wines, are subject to federal taxes.
In short, this means that every time a person buys or sells bitcoins, they’re subject to the same taxes a person would who sold stock, or houses, or any other asset wherein they made a profit. It also means that exchanges based in the US that deal in bitcoin will be subject to the same restrictions as any other asset market.
The bitcoin evangelist-vaunted “zero transaction fees” on goods and services will become a moot point, as income generated via bitcoin will be subject to the same type of fees as if a real estate broker took in a house on trade. That is, the difference in value will be subject to capital gains taxes, which can amount to up to 20 percent.
This is especially problematic for an asset with a built-in deflationary bias. A person who attempts to spend a bitcoin that has appreciated in value will now be expected to calculate the profit they incurred sitting on that bitcoin (between purchase and spending) and report it to the IRS. It’s not hard to see this means bitcoins will be hoarded more than they already are, feeding further into itsstatus as a purely speculative ploy with no real world transaction feasibility.
What this doesn’t mean is that bitcoin will be going the way of the dodo anytime soon. Like any hyped investment – be it gold, real estate in Florida, or shares of Tesla Motors (TSLA) – as long as the die-hards believe enough, the asset will have value. No value as a currency, to be sure, but value nonetheless.