Many questions have been circulating as to what this implies exactly for the future of cryptocurrency, and how it will impact the rate of bitcoin adoption. From my perspective, the primary takeaway from the ruling is that people holding bitcoin will have to keep track of their transactions and report the capital gains on the currency from the time they acquired it to the time they made transaction.
For instance, if I purchased one bitcoin at $100 and then then used that a year later to buy a couch on Overstock.com, and by that point my bitcoin had appreciated to $500, I would have to pay a tax on the difference, in this case $400. This is a hassle. No one wants to keep track of every single purchase they make, and filing taxes is already about as much fun as stabbing yourself in the eye with a fork (which is probably why I still haven’t done it despite the rapidly approaching deadline of April 15, whoops).
Call me a starry-eyed optimist, but I’m excited anyway.
The ruling illustrates that we are approaching critical mass. By that I mean that we are nearing the tipping point at which Bitcoin will be too big to ignore or regulated out of existence. I tend to view bitcoin’s price as a long-term game and as such try not to attribute too much value to any single day’s price movement (also because I’d have to get a pacemaker, and I’m about half a century too young for that) but the market seems fairly unconcerned by the announcement. Movement has been minimal, and the little action we’ve seen has been upward. **This has changed since I originally wrote the post — but again, I view the price as a long-term gain.
I understand that for some, this is a bit of an ideological let down. At this point Bitcoin has attracted people of all political views, but it was originally very well aligned with libertarian ideals—which are of course at odds with big government, regulation etc. Realistically, however, it has always been a matter of time until regulation was put in place around it. Unless we suddenly collapsed into a state of anarchy, there is no way that the US government would permit a gigantic alternate economy to grow in parallel, organically, untouched. Failure to regulate would imply a tremendous loss of both financial and political power domestically, and from an international relations perspective likely weaken Washington’s image. It would also of course be a huge missed revenue opportunity.
** Of course there are reasons why a government might choose to keep regulations very loose or essentially non-existent, similarly to why some countries have lax tax policies, but I’m not going to delve into that here.
Finally, I’m somewhat skeptical the ruling will stand exactly as it was just announced for several reasons.
An interesting and much more user-friendly option would be for the IRS to enact an exception similar to that which stands for taxing foreign currency. Under this ruling, “personal transactions” are excluded from those reporting rules, and if the same were extended to bitcoin, this would remove a lot of friction from the system. I hope upcoming Bitcoin rulings trend in this direction, but it will likely be years until definitive legislation is passed on the matter.
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