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Bitcoins: The IRS ruling shifts the game

April 7, 2014

bitcoin precious image

The IRS recently issued a ruling  that imposes severe taxes on Bitcoins that significantly change the ROI/breakeven analysis for anyone involved in Bitcoins.

The IRS essentially decided to charge taxes on 100% of the value of each bitcoin when it is made.  Before, most Bitcoin miners assumed that taxes would only occur when Bitcoins were converted from Bitcoins to US currency.  Now you instantly have a “loss of value” of 28% – 43% of your investment as soon as it comes into existence.  But it’s a little different.  It looks like a $100 investment taxed at 28% must go up 28% to cover the 28% in taxes.  Harsh.  But that’s not fully accurate, because the IRS taxes the 28% increase as well.  So assuming it’s sold within a year (short-term capital gains), at a 28% bracket, it must appreciate 39% for a Bitcoin to be break even.  Best case scenario, at 15% long-term capital gains it must go up 33%.  At $600 a bitcoin would have to rise to $798 (long term) to $834 (short term) just to be break even.
Essentially the IRS ruling is reasonably destructive to the currency.  It’s also a double edged sword.  My father (a tax attorney) thinks that the ruling will be challenged and overturned.  So, do you pay taxes and avoid penalties (which by any metric are severe and would make these number even worse) or do you wait, and see if the ruling is overturned and hope they redefine Bitcoin as currency?
And all of this presumes stability of the Bitcoin “property” / “currency”.  This is a great graph of bitcoin’s changing value  (Change the time measurement to 1D).  In the last few months it has fallen from 1163 to 450.  This changing stability of course could make the percentages above even different.
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