4 Reasons the IRS Hasn’t Made a Decision about Bitcoin

Governments all over the world are struggling to determine how to treat Bitcoin in their tax systems. Norway and Germany have chosen not to treat Bitcoin as a currency, but instead to regard it as an asset upon which they will levy a capital gains tax. Sweden and Finland recently announced they would do the same thing. China has simply outlawed Bitcoin transactions altogether. In America. However, The IRS has yet to determine what its long-term approach to Bitcoin will be.

Ultimately, the IRS needs to decide whether it will treat Bitcoin as a currency or a commodity. It’s tough to understand how the IRS can afford to take its time ruling on the issue. At the recent Bitcoin Summit, convened by Wells Fargo, concerns were voiced that the cryptocurrency can lead to tax evasion and money laundering. Presumably, the IRS is somewhat concerned about Bitcoin-aided tax evasion. There are several ways to explain why the IRS has yet to respond to the virtual currency revolution. Here are my wagers:

1. The U.S. government is slow.

Slate’s business and economics correspondent, Matthew Yglesias attributes the sluggish response to this issue to a very simple (and painfully predominant) quality of the U.S. government: “in practice changing laws is very difficult in the United States.” He hypothesizes that a minor ruling on the issue could transform into a cascade of public policy debates.

2. Sales in Bitcoin aren’t frequent enough in the U.S.

Currently, there are about 6,000 legitimate merchants in the U.S. that accept payments in Bitcoin. While an interesting phenomenon, those merchants still comprise a small minority of the U.S. economy. For now, Overstock.com is one of the few mainstream stores to accept Bitcoins. (Plus, it turns out that stories of a Tesla purchased in Bitcoins was just hype.)

Right now, Bitcoins are treated like any other asset. In other words, Bitcoins and the goods and services purchased with them incur the same taxes as any other belonging. But since Bitcoins have not been deemed an official “unit of account” by the U.S. government, it is very difficult to enforce a sales tax on a Bitcoin transaction. Only once Bitcoin becomes a predominate method of sales will the IRS benefit from a more aggressive attempt to levy a sales tax on virtual currencies.

3. Not enough high net worth individuals are using Bitcoin.

Sure, lots of people are trying their hand at trading in the e-currency, but Bitcoin has a long way to go before it becomes the predominate method of commerce in the United States. Many investors continue to steer clear of cryptocurrencies because they are not refundable or replaceable.

Until Bitcoin becomes an acceptable primary investment for America’s wealthiest taxpayers, the IRS will make more money by focusing on old fashioned money and investments than it will by expending efforts on taxing Bitcoins as income. Which leads to my last point…

4. The IRS isn’t prepared to enforce new Bitcoin Taxes.

For now, Bitcoin is not legally responsible for keeping track of the same financial information as are the companies that deal in stocks. So even though Bitcoin creates a distinct information trail, in can be difficult to track down it all down for the IRS. Unless a larger number of taxpayers begin transferring their assets to Bitcoin, the IRS would probably lose more money attempting to enforce a reporting system for Bitcoin than it currently loses when taxpayers fail to report Bitcoin transactions.

  • February 13, 2014
  • by Colleen Ahern
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