Bitcoin Taxation Vexation

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Earlier this week, Bitcoinx reviewed some of the decisions shaping Bitcoin regulation around the world.  While there has been no movement regarding classification of the crypto-currency on the part of the IRS, their silence means more to Bitcoin users than just frustration.

IRS needs clear tax rules on Bitcoiin

IRS needs clear tax rules on Bitcoin. Image via Michael Carney/pondodaily

Though there are a growing number of businesses and high-profile websites accepting the virtual currency, the lack of direction on the part of the IRS may be affecting Bitcoin (and its users) on two fronts: investment and evasion.

Richard Asquith, Head of Tax for international expansion and investment firm, TMX Group, noted that if the new rules go through in the UK, the regulation could be highly beneficial for Bitcoin – in the UK.  “If the UK tax re-categorisation goes ahead, it will stabilize the domestic Bitcoin exchange market which had been threatening to move out,” he said in an interview with Forbes. Asquith went on to add that “it would also probably start attracting European and even global trade to migrate to the UK as it will be one of the first countries to have a well thought through tax regime.”

While any stabilization in the market is likely to help Bitcoin in the long run, the absence of clear rules may be drawing potential investment away from the uncertainty in domestic markets.

The lack of clarity on the part of the government has others in the U.S. concerned with the issue of tax compliance.

In an annual report to Congress, National Taxpayer Advocate, Nina Olsen made it clear that “It is the government’s responsibility to inform the public about the rules they are required to follow.”  Olsen, who leads the independent Taxpayer Advocate Service office within the IRS, added that “the lack of clear answers to basic questions such as when and how taxpayers should report gains and losses on digital currency transactions probably encourages tax avoidance.”

Whether they ultimately decide to treat Bitcoin as a capital asset or a fiat currency for tax purposes, one thing is clear, the IRS needs to make a decision – and the sooner the better.

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