A brief discussion on the taxation of Bitcoin

About two years ago, the U.S. Internal Revenue Service (IRS) issued a brief guidance on Bitcoin and other digital currencies, but to date, no specific government documents have been issued on the taxation of digital currencies.

In the middle of this month, the American Institute of Certified Public Accountants (AICPA) sent a letter to the U.S. Internal Revenue Service, raising 10 issues and asking it to make specific responses, including the taxation of small transactions and digital currency charitable donations.

Annette Nellen, a professor at San Jose State University who drafted the AICPA's request letter, said:

Before entering into the audit process, we need to clarify the taxation rules.

The taxation of digital currencies is one of the biggest obstacles to their adoption. Bitcoin and its competitors, such as Ethereum, Ripple and Litecoin, exist on a network, and their transactions are processed and verified by the network, not by any government.

According to tax attorney Bryan Skarlatos, the IRS has begun auditing Bitcoin holders, some of whom have paid for using Bitcoin.

A spokesperson for the IRS said that it is not convenient to disclose the details of the taxation of digital currencies at this time, but they attach great importance to external opinions, especially those from professional tax professionals.

Two years ago, the U.S. government introduced laws targeting digital currencies, which led to a surge in the popularity of digital currencies. Companies such as online retailer Overstock.com and the Sacramento Kings basketball team announced that they would accept Bitcoin payments. Unfortunately, the volatility of Bitcoin prices and the Mt. Gox scandal in 2014 drove some investors away.

According to a survey by Blockchain.info, a Bitcoin blockchain data query service provider, two years ago, the average daily transaction volume of Bitcoin was 50,000, but now it is as high as 24万笔. The price of Bitcoin reached a high of 1100美元at the end of 2013, fell to $200 at the beginning of 2015, and now it has exceeded 600美元.

Many Bitcoin enthusiasts are very supportive of the digital currency taxation management released by the U.S. Internal Revenue Service in 2014. This document classifies digital currencies as property, similar in nature to real estate or stocks.

Therefore, regardless of profit or loss, holders of digital currencies such as Bitcoin must report their status to the IRS.

Barry Silbert, CEO of Digital Currency Group, said:

This tax management method is very useful.

However, some people only use Bitcoin for daily payments, and according to the above guidelines, each of their transactions is similar to investment property transactions. Therefore, even if they just use Bitcoin to buy lunch, they need to report investment gains and losses like stock transactions.

Some bitcoin holders are clueless about the rule. Douglas Hutchings, an investor, said he has used bitcoin to buy $1,500 worth of goods on Amazon this year. He uses online wallet Purse.io to process transactions, but he has no idea what the tax will be.

Digital currency experts hope that the IRS will implement a tax exemption system for small Bitcoin transactions, just as American taxpayers do not have to report small foreign currency gains and losses when traveling. Tax expert Robert Willens said that for this tax exemption issue, the IRS can make its own decisions without the consent of Congress. However, how to prevent this "exception" from being abused is an urgent problem that needs to be solved.

Meanwhile, some companies are also working on designing accounting software. Libra.tech has a web product that automates the tracking of digital currency transactions, which helps ease the record-keeping problem.

Other businesses that accept digital currencies don’t care whether the IRS comes up with specific rules. Pensco Trust Company specializes in custodial services for alternative assets (including Bitcoin) for retirement accounts, as long as the accounts are legitimate and trustworthy.

Fidelity Charitable can accept Bitcoin donations, which can help donors get a charitable tax deduction, so that they don't have to pay high taxes like dealing with assets such as stocks or real estate.