Will the IRS ruling launch a new niche market for bitcoin startups?

Home » Will the IRS ruling launch a new niche market for bitcoin startups?
Image: http://www.flickr.com/photos/duyhoa_dao/

Image: http://www.flickr.com/photos/duyhoa_dao/

Yesterday, the IRS declared that bitcoins were to be treated under the same rules as stocks under U.S. tax law, causing a wave of relief for seasoned investors and a chill of quiet panic among casual users. A literal interpretation of the rules would require an immense amount of bookkeeping for anyone who would use the virtual currency as an alternative to cash.

As Wired points out:

[Under] the IRS’s rules, if you bought a bitcoin for $10, and then used it to buy a 1 BTC television when bitcoin was trading at $600, you need to pay a capital gain tax on the $590 difference. In other words, you now need to keep track of the value of bitcoins, in U.S. dollars, both when you acquire them and when you spend them, and report the difference on your taxes.

The IRS rules also suggest that not all bitcoins can be valued at the same rate for tax purposes, essentially making them non-fungible. While these rules are likely to be revised in the coming months, the current situation creates a huge problem for many people who simply want to use their bitcoin without worrying about an audit.

New problems can create new opportunities, however:

I think this is going to create a huge opportunity for hosted wallets,” says Jered Kenna, a bitcoin entrepreneur and the CEO of Moneyandtech.com. He believes that the smart bitcoin wallet makers will simply be able to add this as a service, tracking the capital gains and losses as you spend your bitcoins through the year, and maybe even issuing you a convenient 1099 at the end of the year.

The service wouldn’t need to be limited to hosted wallets, however. Given the open nature of the blockchain and related price charts, even standard wallets desktop or mobile wallets could offer this option as an option. Calculating this on a per-address basis should prove relatively easy, even in a simple web-based interface. Of course, if its easy for the owners of an address, it will be just as easy for the IRS.

The future of service-based cryptocurrency applications could springboard off of the biggest legal headache to yet hit the U.S. bitcoin community.

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