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Bitcoin: Is It Money, Or Is It Not?

Jun 19 2013

We have been writing quite a lot about Bitcoin, and we have been calling it a cryptocurrency, digital currency, or virtual currency. It may, however, turn out that all this time we've been fundamentally wrong. 


Last week the European Central Bank (ECB) delivered a presentation on virtual currencies at the Global Forum on Law, Justice and Development held last week in Washington DC. 


In that presentation, the speaker - Iddo de Jong from the Market Integration Division at ECB - pinpointed the three functions of money: 


- Medium of exchange: money is used as an intermediary in trade to avoid the inconveniences 

of a barter system. 

- Unit of account: money serves as a standard numerical unit for the measurement of value and costs of goods, services, assets and liabilities.

- Store of value: money can be saved and retrieved in the future.


“Bitcoin does not meet any of these functions”, concluded then de Jong and considered its opinion voiced. The presentation ended with a disclaimer: “The views expressed in this presentation are those of the speaker and do not necessarily reflect those of the European Central Bank” - but then again, de Jong presented on behalf of ECB. 


Then there's the USA. The Government Accountability Office (GAO) there issued a 27-page report, where it ponders over virtual economies and currencies and comes to the conclusion that “Bitcoins act as a real world currency in that users pay for real goods and services, such as coffee or web development services, with bitcoins as opposed to U.S. dollars or other government-issued currencies. Third-party exchanges allow bitcoin users to exchange their bitcoins back to government-issued currencies, such as U.S. dollars, euro, or yen”. Based on this, the report went on to stipulate that Bitcoin transactions are subject to federal tax and passed the ball to the IRS to collect these taxes.  


Still, an important question remains open: how will the IRS track Bitcoin transactions? Despite the fact that each and every BTC payment is recorded diligently, the records hold little information about the transaction parties – and this is a golden opportunity for tax evasion. There's no established legal framework to govern virtual currencies, including Bitcoin, and although this may change in the future (the CFTC is currently looking into the question), until it happens, there is practically no way of calculating how much money the IRS should collect on Bitcoin transactions. 


For the time being the IRS has issued some unofficial guidelines for taxpayers. These include the following hypothetical examples to give people an idea what they are supposed to pay taxes on: 


- Trading real-world goods and services for virtual currency results in taxable income;

- Earning virtual income (for example by renting out property on SecondLife) and converting those earnings into dollars, is taxable income;

- Mining Bitcoin successfully constitutes taxable income; and so forth.


Good luck with all that, IRS – I'm really looking forward to seeing whether any tax on virtual-currency income will ever be reported and collected (but I highly doubt it that it would). 


In the meantime, there is still no unequivocal answer to the question we began with: is Bitcoin money, and the answer depends on who you ask: the ECB in Europe, GAO in the United States, or brokers who offer Bitcoin binary and forex trading. 

TAGS: Bitcoin  forex  virtual currency  ECB  IRS  GAO  federal taxes  bitcoin tax evasion 
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