Bitcoin and Virtual Currencies

Can virtual currencies be taxed like real money?
BY: ORLANDO GOTAY

When I first heard of bitcoin, I thought it was imaginary currency used in online games. As it turns out, virtual currency is something that has literally exploded in terms of use, acceptance and value. No longer only used by gamers or techies, ordinary people now use virtual currencies to anonymously create significant holdings, able to move and convert them into real world currency with little effort.

Bitcoin is a type of digital currency in which encryption techniques make it impossible to trace. And, the bitcoin world operates independently of a central bank from any country.

The significance of using bitcoin in the near future is remittances sent by Mexicans working in the United States may soon abandon Western Union and use bitcoins.

Countries have taken different approaches as to what to do about virtual currencies. Some say they are outright illegal; some have stated they cannot be regulated. In confusing, and somewhat nebulous statements, the Bank of Mexico and the SAT (the Mexican IRS) have equated them to cash, applying to bitcoin the same restrictions they do to cash transactions. The IRS issued guidelines treating bitcoin like any other non-cash property; if sold or exchanged, it can be taxable.

With bitcoin, a user can buy webhosting services, cars, homes, and even pizza and manicures. In January 2016, it was reported that more than 100,000 merchants globally were accepting bitcoin payments, with businesses such as Overstock.com, Home Depot, DirectTV, Dell, Microsoft, Amazon and Expedia topping the list. By late 2016, the number of merchants was forecast to grow to 150,000.

The IRS is concerned (of course) about people working and getting paid in bitcoin, leaving no money trail. Paradoxically, all virtual currency transactions are public. The rub is that no one, except the parties involved, knows who is behind a specific transaction. That, as you can imagine, makes the taxman very, very jittery.

Perhaps that’s why I wasn’t surprised to learn of a successful effort by the IRS to serve a court-approved summons (an order to turn over documents) to Coinbase, Inc., of San Francisco. The summons orders Coinbase to turn over the names of all U.S. persons who conducted transactions in a convertible virtual currency from 2013-2015. Obviously, not all the people involved are suspected of doing anything wrong, but the IRS will look into these documents to ascertain the level of compliance with the tax laws of these persons.

So how legal is this? A lot of people are arguing over it now. There’s debate between this and that economic school, between politicians, between programmers. Some people are smart; some are misinformed. Some say the system is worth a lot; some say it’s actually worth zero. Some guy actually put a hard number on it: $1,300 per apple. Some say it’s digital gold; some say it's a currency. Others say they’re just like tulips. Some people say it’ll change the world; some say it’s just a fad.

Bitcoin is still evolving, but if Mexicans in the United States are prohibited by Donald Trump from sending money home, like he claims he will do, well then, just watch that $22 billion a year in remittances migrate to bitcoin.

More to follow … this chapter is far from over.

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Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com. This is informational; consult with your professional of choice.