28 Mar 2014

Tax Treatment Bask

Bitcoin, Gold 28 Comments

People are getting riled up over the IRS ruling on Bitcoin; this analysis claims that now BTC has no chance as a currency (as opposed to a mere asset that might be useful for many reasons).

Here’s my question: Right now, suppose I convinced a bunch of gold bugs to start using gold coins in our little network, whenever possible, as the basis of our transactions. How would the IRS deal with it, assuming we kept records and wanted to do everything in compliance with them? E.g. would the gold coins be fungible, or would I technically have to keep track of when I bought and sold each one, for purposes of calculating the capital gain?

Also, how does this work with regard to foreign currencies right now?

28 Responses to “Tax Treatment Bask”

  1. Dan (DD5) says:

    Why is keeping track of when you buy or sell makes an intrinsically fungible good suddenly not fungible? Quite silly. As if the IRS can change the fact that an ounce of gold is the same as any other once of gold.

    • Silas Barta says:

      Two workarounds:

      1) Set your wallet software to use the most tax-efficient “coins” (previous transactions) to use, whether that’s FIFO or LIFO for your case.

      2) De-fungibilize (standard term for this?) the currency: either with an anonymization layer on top of Bitcoin, or with a different cryptocurrency that implements it.

      With cryptography, it’s possible to have a system that proves you own (and can prove you have spent), without revealing “which one” you spent, thanks to wondrous zero-knowledge proofs.

      I suspect that those possibilities will make the IRS (eventually) reconsider the rules that make bitcoins distinguishable for taxes.

      • Silas Barta says:

        Oops, that would be fungibilize, not de-.

        And “proves that you [someone] own … a particular amount of money”.

        • Major_Freedom says:

          The great thing about computer hacking is that it is anarchist to its core.

          I’m confident there will be workarounds to the parasitic thugs in government.

          • Tel says:

            The obvious workaround being that sufficiently large numbers of anonymous transactions make the tax laws difficult to enforce. Mind you the cash economy does that already.

  2. joe says:

    The business using a foreign currency has to meet the IRS guidelines for “functional currency.” You have to maintain books and records in that currency and transact most of your business in that currency..

    If the business does not meet the functional currency requirements, then gains and losses in dollars from every transaction have to be reported to the IRS. Gains are ordinary income, not capital gains.

    Individuals have to use the dollar as their functional currency. If your principal place of business is in the United States, you also have to use the dollar as functional currency.


    • Major_Freedom says:

      Not if the hackers can help it.

    • Tel says:

      Interestingly a business that conducts 90% of its trade in Bitcoin and 10% of its trade in US dollars, is by the IRS own ruling this business would be using the US dollar as functional currency.

  3. Paul-Martin Foss says:

    Gold and silver coins are taxed as collectibles, as defined at 26 USC 408(m), hence there are capital gains and losses. There are some exemptions from the collectible tax rate for certain gold, silver, and platinum eagles, and bullion held by certain trustees, but that just exempts those coins from the (higher) collectible rates; they’re still subject to the (lower) capital gains rate.

    With regard to fungibility, I’m not a tax lawyer and I’m not sure what the IRS rules are. I would imagine the safest approach would be to document each coin, but it’s possible that there are FIFO/LIFO provisions that can be used in the event that you’re only dealing with one type of coin.

    These tax requirements are one of the hindrances to the use of precious metals as money that Dr. Paul always addressed in his competing currencies legislation.

    • Bob Murphy says:

      Thanks this is great Paul-Martin!

    • Bob Roddis says:

      I could look this up but what Mr. Foss said is my general understanding. Each item of precious metal would have its very own adjusted tax basis (to calculate gain or loss) and any exchange of said metal for other assets would be treated like any other taxable exchange of property except that the gold might have the higher 28% rate as a collectible.

  4. andrew' says:

    A. Change the bad laws.
    2. Whatever.

    If it can get to money status the value won’t fluctuate much. This indicates the greatest threat to achieving that status is government and its bad law.

    Attacking currencies and gold and educators in a depression: good job government!

    • andrew' says:

      Add to the list of possible workarounds (to reduce the impact of bad law) to use within self-directed IRA.

      Again, this illustrates how gold likewise might be a fine currency if not for attacks by government.

      • andrew' says:

        I wonder if the could set up a system of bitcoin automatic intertrading.

        Any bitcoins in this account would all be “current”. Yes, you’d have to pay the bad law tax on that subset, but they’d be “internally” “fungible”

        • andrew' says:

          Use the IRA for asset purchases and holding bc as anasset and the internally fungibilizing account for currency use.


          • andrew' says:

            Perhaps bitcoin 2.0 should be programmed to be pegged to the dollar to work around this arbitrary bad policy.

            If bitcoins double in value, bit coins can spilt to solve the fungibility problem.

            Since we always have inflation we don’t have to worry about taking coins away.

    • Silas Barta says:

      III. Keep letters and numbers distinct.

      • andrew' says:

        Pretty funny in view of below.

  5. Bob Roddis says:

    I have not read or reviewed the original materials:


    A. IRS Revenue Rulings on Taxation of Precious Metals and whether Exchanged and Replaced Metals Are of “Like Kind” [in order of date]

    (1) Rev. Rul. 74-218, 1974-1 C.B. 202 – Currency in its usual and ordinary acceptation is defined as gold, silver, other metals or paper used as a circulating medium of exchange. Silver coins received for real property are to be treated as property and not as money; the amount realized by the taxpayer from the exchange was the fair market value of the silver coins ($6,000) rather than the face amount of the coins ($2,000).

    (2) Rev. Rul. 76-214, 1976-1 C.B. 218 – The exchange of Mexican 50-peso gold coins for Austrian 100-corona gold coins, both of which are official government restrikes [and “bullion-type” coins], qualifies for nonrecognition of gain under section 1031(a) of the Code.

    (3) Rev. Rul. 76-249, 1976-2 C.B. 21 – A taxpayer who receives U.S. silver coins having a value in excess of their face value in exchange for appreciated real property realizes a taxable gain based on the excess of the fair market value of the coins over the adjusted basis of the real property.

    (4) Rev. Rul. 79-143, 1979-1 C.B. 264 – The exchange of U.S. $20 gold coins (numismatic-type coins) for South African Krugerrand gold coins (bullion-type coins) does not qualify for nonrecognition of gain as a like kind exchange under section 1031 of the Code.

    In this ruling, the Service provided the following reasoning:

    “[A]lthough the coins appear to be similar because they both contain gold, they actually represent totally different types of underlying investment, and therefore are not of the same nature or character. The bullion-type coins, unlike the numismatic-type coins, represent an investment in gold on world markets rather than in the coins themselves. Therefore, the bullion-type coins and the numismatic-type coins are not property of like kind.”
    (5) Rev. Rul. 82-96 – The exchange of gold bullion for Canadian Maple Leaf gold coins (which are legal tender in Canada to the extent of face value of $50 each) qualifies for nonrecognition of gain or loss as a like kind exchange under section 1031(a) of the Code.

    In this ruling, the Service provided the following reasoning:

    “[B]ecause the value of the gold content in each Canadian Maple Leaf gold coin greatly exceeds its face value, it is not a circulating medium of exchange. Therefore, the Canadian Maple Leaf gold coin is property rather than money for purposes of section 1031(a) of the Code. Because the Canadian Maple Leaf gold coins are bought and sold for their gold content, they are bullion-type coins. Therefore, the nature and character of the gold bullion and the Canadian Maple Leaf gold coins are the same, and they qualify as ‘like kind’ property as that term is used in section 1.1031(a)-1(b) of the regulations.”
    (6) Rev. Rul. 82-166 – The exchange of gold bullion held for investment for silver bullion held for investment does not qualify for nonrecognition of gain as an exchange of like kind property.

    In this ruling, the Service provided the following reasoning:

    “[T]he values of the silver bullion and the gold bullion are determined solely on the basis of their metal content. Although the metals have some similar qualities and uses, silver and gold are intrinsically different metals and primarily are used in different ways. Silver is essentially an industrial commodity. Gold is primarily utilized as an investment in itself. An investment in one of the metals is fundamentally different from an investment in the other metal.”


    • Bob Roddis says:

      I’ve always loved the way tax professionals (being so professional) always refer to it as “the Service”. Not to prejudge people or anything, but it’s generally a good indicator that you are not dealing with a fellow Rothbardian.

      • Tel says:

        Amazing levels of self contradiction. Ruling (4) and ruling (5) manage to start at the same point and reach opposite conclusions.

  6. Daniel says:

    The IRS ruling regarding mining of Bitcoin is rather interesting. The IRS ruled that the taxpayer who successfully mines virtual currency realizes gross income upon receipt of the virtual currency. This is apparently inconsistent with the way property is ordinarily treated. Ordinarily, a gain or loss is realized upon the disposition of property, not the acquisition. Accordingly, gross income should be realized when the successfully mined Bitcoin is exchanged, not when it is mined.
    Perhaps the IRS is treating mining of Bitcoin as compensation for services rendered. The miner is performing a service, using computer resources to validate Bitcoin transactions and maintain the public ledger, and is being compensated with Bitcoin. Under section 61 of the Tax Code, such compensation should properly be treated as gross income.

  7. Dan(DD5) says:


    “Unfortunately, this has some serious implications for the future of bitcoin. I have to question the effectiveness of bitcoin as a medium of exchange when the user has to calculate his or her tax liability on every single transaction. As the saying goes, the power to tax is the power to destroy, and this is no exception.”

  8. guest says:

    Something to keep in mind: There’s no such thing as a “fair market value”.

    • Major_Freedom says:

      There is. Fair market value is just market value which is just the exchange ratio in a market.

      If you mean “fair” to distinguish from empirical market prices, then I would agree.

  9. Yancey Ward says:

    The law will change to fit the market’s movement. People will use Bitcoin or they will not, regardless of what the IRS does. If Bitcoin reaches a critical level of use, the law will bend or be completely ignored.

    • Andrew' says:

      Yeah, so if there is a “conspiracy” (broadly defined as ‘duh, of course government principal-agent effects are a thing’), it would surely be to keep it from reaching critical mass.

      • Andrew' says:

        On a side note, I love how Cass Sunstein gets away with a “no true Scotsman” argument, among other fallacies and gets tons of “retweets.”

        So yeah, if you don’t want to appear to be undermining a currency, stop attacking it at the keystones that make it a currency.

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