Taxing Every Bitcoin Purchase May Backfire for the IRS

Cryptocurrency Tax

Bitcoin investment has a special way of teaching users about the principles of unintended consequences.

One example is when China started to inspect regulated exchanges early last year. They believed that these exchanges might be shut down. Buyers moved to Localbitcoins, and their volume increased by 3,600% in a month. By making an effort to track and control bitcoin investment, the government drove them to a harder platform to surveil.

The IRS has begun taxation of bitcoin, and this has produced a similar result.

By telling taxpayers to calculate their capital gains taxes whenever they buy a $25 gift card with bitcoin, they are giving them another reason to view bitcoin as digital gold.

From a different perspective, guidance from the agency may promote the usage of unregulated foreign crypto exchanges that offer privacy coins such as monero and zcash.  It is certainly a causative factor behind the self-reporting rate amongst bitcoin users when it is tax time.

Many bitcoin users know that paying their taxes on both long and short capital gains isn’t only compulsory but fair. Same cannot be assumed for taxing purchases of smaller items under the guidance issued by the IRS 4 years ago.

The 2014 guidance

The guidance was introduced in March 2014, and the market was totally different.

During that period, Vitalik Buterin introduced Ethereum and Mt Gox halted all withdrawals. The Coinsummit was held that year, and the IRS stated that cryptocurrency would be treated as personal property even though it is used to buy simple items.

This guidance may propel companies to build tools to track bitcoin spending while improving tax reporting. It may bring in some development in that sector, but the effects may be negative in the long run.

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