The Tax Issue May Drive Official Bitcoin Definition

Death and taxes as the old adage goes. At least one of these two certainties seem set to force the hand of governments in recognizing Bitcoin as legal tender or at least giving it some degree of official legitimacy in order to tax it. We have seen this in India recently, Singapore followed shortly thereafter and now it seems that the tax question around Bitcoin is coming to US shores.

Of course these are not the only countries to mull over the question of how Bitcoin should be taxed. But it is interesting to note that unless Bitcoin is officially defined by each country, even if it is not declared a legal tender, then a regulatory framework to tax it will be difficult to pull off. And the tax department never wants to lose out on a buck.

The IRS And Bitcoin

It seems that calls are coming from within the IRS in the United States about how to handle Bitcoin. The Taxpayer Advocate Service is an independent organization within the IRS and its head, Nina Olson, has put pressure on the IRS to face the digital currency issue as soon as possible as she cited it among the “most serious problems” in this year’s annual report to the U.S. Congress.

Olson warned that there is confusion and misconceptions on the part of U.S. businesses due to a lack of tax guidance on Bitcoin. This could even encourage tax avoidance. It seems that this lack of guidance has businesses and individuals seeking information off the internet and often being misled by incorrect advice. Olson went on to state that many may be surprised to discover that Bitcoins could be liable for capital gains.

Capital Gains Tax and Foreign Money Account

For those who are unfamiliar with the concept of capital gains, it refers to the gain between the lower purchasing price and higher selling price when a capital asset is disposed of. Typical capital assets includes stocks, bonds and real estate. Short term capital gains are liable for a higher tax rate. For large Bitcoin traders and speculators, it could be a hefty tax bill.

Then there is the issue where US residents and citizens are required to declare a foreign account holding more than $10,000 to the IRS. An online wallet holding your Bitcoin could be viewed in this light but it is still unclear whether this law does apply to Bitcoin just yet. Nevertheless it does raise interesting questions for businesses and individuals who may be trampling on tax laws and not even know it.

Is Bitcoin Official?

What may be even more interesting to observe though is how this may force the hand of the government to take a stance on Bitcoin. Earlier this month we saw how the Indian government’s tough stance on digital currency was contradicted by the more open-minded approach of the Indian tax department over how to view Bitcoin.

In order to tax it, Bitcoin has to be officially defined by a government – is it money, a voucher or something else? Then a regulatory framework has to be developed to allow individuals, businesses and particularly financial service providers to understand how they can handle it. In the process of giving the government a method to tax the cryptocurrency, it also works to the benefit of the community as it forces authorities to recognize these currencies – in some form or the other.

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