More to the point, is it worth it for entrepreneurs to deal with bitcoin? Bitcoin is appealing to a very particular demographic, so whether the trouble is worth it for your small business depends a little on target market. Are you marketing to young-ish, affluent-ish, early adopters of new technology? They are the customers most likely to be attracted by a bitcoin-friendly environment. Discount socks? Not so much. Recent IRS guidance, while not making the bitcoin situation easier for users, may make it a little clearer, at least temporarily. What does IRS Notice 2014-21 mean for bitcoiners?
There are basically three things you can do with bitcoins. You can use them for transactions. You can invest in them, and you can mine them, so presumably, you could do one of the other two things.
Conducting Transactions with Bitcoin Seems to Have Gotten Harder
The IRS has now made clear that it intends to treat bitcoins as property, like stock, rather than as currency, like the euro. That means that any transaction conducted using bitcoin may result in a gain or a loss. Users will have to track each transaction to determine cost basis and holding period, a nightmarish situation that could cripple commerce, except perhaps for the developer of the smartphone app to do this. But how, realistically, is enforcement going to happen, since computerized wallets remain anonymous? It is not clear where this is directed, given limited enforcement resources at the IRS. Perhaps this is just a warning shot over the bow, or perhaps the target is someone other than the individual user.
Bitcoin Investment May Have a Place in the High Risk Portion of a Portfolio
Since bitcoins are property, they may have a legitimate place in your investment portfolio. Long term capital gain rates can be relatively modest and net capital losses can be deducted from ordinary income, up to a certain maximum. It’s a gamble, of course, with wildly fluctuating value, but bitcoin may be interesting to some investors. This is clearly a place for professional investment advice.
Mining for Bitcoin Is Treated Like Any Other Income Producing Endeavor
The IRS has also declared that when a taxpayer successfully “mines” virtual currency, the fair market value, determined as of the date of receipt, is includible in gross income, either as wages or self-employment income. If classified as wages, this income is subject to federal income tax withholding, Federal Insurance Contributions tax, Federal Unemployment Tax Act tax and must be reported on Form W-2.
An Opportunity for IRS Comments?
The IRS has called for additional comment on the issue, so that it can develop regulations. The international community deals with virtual currency in a wide variety of ways, with Germany, for example, willing to treat it as money. This and the IRS's request for comments seems to suggest some fluidity in the situation. Comments can be submitted by mail, hand delivered or e-mailed to Notice.Comments@irscounsel.treas.gov. For those with a stake in bitcoin commerce, this may be an opportunity to help shape policy.