On Bitcoins, Tulips And IRS Tax Compliance
If the recent stir about IRS interest in bitcoins and other cryptocurrencies has you worried about whether your clients have been fooling with bitcoins or you have been fooling with them yourself, Perry Woodin of Node4o LLC might have some software to help you out. I had a nice chat with Perry on Friday and he advanced my education on cryptocurrencies quite a bit. He has not shaken me from my overall evaluation of cryptocurrencies which is summed up in two words – tulip bulbs.
Bitcoins As Tulip Bulbs?
According to CoinMarketcap.com , there are 710 cryptocurrencies worth tracking or trying to track. The aggregate value of all of them, as I write this, is $14.6 billion. Bitcoins with $12.7 billion in market value make up 86.7%. There are 20 altcoins (cryptocurrencies other than bitcoin) with market caps greater than $10 million. DASH, which Perry works with quite a bit comes in seventh with $67.2 million. All this value is created by burning a lot of computer time solving math puzzles to journalize every single transaction into blockchains of greater or lesser transparency , depending on which currency you are taking about.
And what does that have to do with tulip bulbs? Required reading for anyone ever involved with finance and markets should be Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay where you can learn about the tulipmania that gripped Holland in the seventeenth century. If you want a different two words you might try “new economy” which in retrospect we call the “tech bubble”.
But I’m just a tax blogger who flunked out of graduate school in history not a financial seer, so let’s focus on the immediate practical problem faced by bitcoin users, which up until now have accounted for almost all the action. From here on I will just talk about bitcoins.
IRS And Bitcoins
Bitcoins were introduced in 2008, but it was not till 2014 that the IRS got around to issuing some guidance. The guidance in Notice 2014-21 told us, not unsurprisingly that bitcoins are not tax fairy dust allowing us to earn and spend without paying any taxes. If you received bitcoins for providing services, you had gross income and so on. More substantively the Notice told us that bitcoins were not, for tax purposes, a currency but were property. That meant that when you exchanged bitcoins for other stuff you had to recognize gain (and maybe loss) and that gain might be long or short term depending on how long you had held the bitcoin.
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