Lets start with a brief history of the IRS. President Lincoln designed the position, “Commissioner of Internal Revenue” in 1862. His objective was to create an income tax to underpin the war expenses. However, ten years later it was repealed, revived in 1894, and repealed again and ruled unconstitutional the following year. Proceed to 1913, Wyoming ratified the 16th amendment which enabled congress to enact an income tax. Five years later in 1918 during World War II, congress installed payroll withholding and quarterly tax payments. In the 50’s the organization was reorganized and deemed the “Internal Revenue Service”. In 1998, the “IRS Restructuring and Reform Act of 1998” prompted the most comprehensive reorganization and modernization of IRS in nearly half a century.
Now that the boring part is over, lets plunge into how this correlates to bitcoin. Unfortunately, none of these evolutionary modifications within the IRS were constructed to universally conform to a decentralized digital currency. Within all the rules, regulations, and categories that are suited for money, there is no flawless suit for bitcoin. This can be as petrifying as it is exiting. But nevertheless, how does a bitcoin correspondent ensure that he or she is satisfying the rules? We all know unintentional mistakes can result in substantial penalties. The exiting part (at least to me) is the prospective loopholes that may hold in the future. Dodging taxation at this point is elementary. However, what will the regulatory system look like throughout the next decade, and will it still be painless to avoid paying Uncle Sam? This article can be advantageous to two audiences; those who wish to follow some sort of tax law to avoid penalty, and those who wish to avoid the taxation of their bitcoins all together. In the end, they both are relying on knowledge of tax categories potentially suitable for bitcoin.
One concept to think about, is that complying with the tax code could suggest bitcoin users may be eligible for deductions. In any case, each individual should take precautions and hire a qualified professional to aid you in deciding which position is most applicable to your situation. Finally the big question; how might bitcoin be taxed, at what level, and when?
The first possibility I found fitting, was considering bitcoin to be a form of “barter”. According to Arthur O’Sullivan, and Steven M. Sheffrin in their book, “Economics: Principles in Action. Pearson Prentice Hall.” on page 243 they define barter as:
a system of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money.
Barter is different from “gift economies”, in that the requited trade is instantaneous. Characteristically bilateral, but also can be potentially universal or multilateral. This method is not only established, it would save both parties headache in developing alternatives to barter.
The next potential method is property. Although digital currencies have not yet officially been deemed property, digital goods can and in some reasoning have been regarded as property. Such as: software programs, music, video or other digital files on the web. exchanging any intangible object such as computer code, which could potentially extend to bitcoin, would allow this ‘property’ to be taxed in a barter-transaction fashion.
Recognizing bitcoin as a service is an additional alternative. Assuming bitcoins themselves are not taxable property, providing access to them could be a service, and taxation of bartering with services would apply.
There are also foundation to consider bitcoin as a foreign currency. I don’t necessarily agree with this approach because I don’t understand how the IRS would define bitcoin domestic or foreign. Anyhow, the resemblance of foreign currency transaction to bitcoin transaction may allow it to be taxed accordingly.
Indubitably, more research is necessary to gain a complete comprehension of each of these methods, but this outline should suffice in getting started. If consumers hope for the survival of bitcoin, taxation shouldn’t be opposed. After all, as inefficient as our government can be, if Uncle Sam can find a way to adapt, sky’s the limit for bitcoin.