Bitcoin Investing Just Got a Lot More Complicated

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When the Internal Revenue Service (IRS) issued its guidance on digital currency a few weeks ago, it seemed that Bitcoin investing had gotten some very good news.

See, the IRS had just issued a ruling in which the tax agency said it intended to treat the radical new digital currency as property, not currency.

At the time, the Bitcoin community applauded the move. Then again, IRS officials made it sound like they were going to treat Bitcoin profits as capital gains, which are substantially lower than what most investors pay for income taxes.

While the ruling technically meant that Bitcoin users would need to track every transaction for tax purposes, few believed the IRS would seriously enforce such a burdensome provision.

bitcoin investing

IRS attorney Keith Aqui even told The Wall Street Journal that small businesses and customers may "not have to worry" about being taxed on purchases made using Bitcoin.

Now, it turns out that U.S. citizens involved in Bitcoin investing just might have to deal with those headaches, after all.

In a Journal story last week, Aqui says the agency's decision to treat Bitcoin as property will in fact be applied to all transactions – even the smallest ones.

This means if you go to buy a beverage or pastry from a coffee shop using Bitcoin, the transaction will be taxed as if it was a stock being sold on an exchange.

Aqui, who worked on a recent Q&A document released by the IRS, went on to say that taxing all Bitcoin transactions "would be cumbersome, but that's the way the law is written, and that's the way we have to administer it."

I think this is nothing short of a sham by a scared federal government using its IRS watchdogs to crack down on a free-market currency. If it sounds like my blood is boiling, that's because it is.

When I told you about Bitcoin in my webinar "Edison's Revenge on the Dollar," I talked at length about how global governments were worried that Bitcoin investing would undermine their control over fiat currency.

Clearly, the IRS' new policy is just plain nuts. But I think something positive can come out of this. Some enterprising entrepreneur will come up with an app that tracks all your transactions in a single dashboard.

And I hope they go public so we can acquire the stock…

Bitcoin Investing: Is It Time to Sell?

While we're on the topic of Bitcoin investing, I'd also like to address an issue that a lot of folks have been asking me about – Bitcoin prices.

A string of negative news items – namely the Mt. Gox bankruptcy and moves by the People's Bank of China to close the bank accounts of Bitcoin exchanges – have hurt Bitcoin prices lately.

In fact, today the CoinDesk Bitcoin Price Index slipped below $400.

But despite the obvious challenges facing the still-young Bitcoin, I haven't backed off my belief in this radical new virtual currency. Still, the price volatility is exactly why I recommend that while people definitely should get involved Bitcoin investing, they shouldn't bet the farm.

However, in terms of when to sell your Bitcoin, that's really up to each individual investor looking at their portfolios and being candid with themselves about their risk tolerances.

As for me, I'm not selling…

Up Next: You may have noticed that often the splashiest IPOs don't fare all that well. The truth is, it's usually the smaller, less-covered companies that have the most upside potential. Here are some tips on how to find these IPOs – and when to buy…

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About the Author

Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.

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  1. Lance | April 14, 2014

    Thanx. Enjoyed your presentation. Want to learn. Bought your short term offer to better understand what Bitcoin is about. Certainly appears clever. Thanx.

  2. ShellyM | April 24, 2014

    I'm confused, Michael. If the IRS taxes every transaction made with Bitcoin, isn't that double taxation? And if Bitcoin transactions are truly anonymous, how will this new tax law be enforced? Your insight is appreciated. Thanks!

    • David Zeiler | April 24, 2014

      ShellyM:
      The IRS seeks to tax the gain you may have from the time you purchased the Bitcoin to when you spent it. So it's not really double taxation, as you would only be taxed on the gain, not the total amount of Bitcoin you spend. (That also means a drop in the Bitcoin price could create a loss that could be deducted from the gains, adding to the complexity.) Obviously this is very unwieldy, as it would be hard for individuals to track and virtually impossible to enforce. Contrary to what some have said, Bitcoin transactions aren't totally anonymous; although they carry no personal information, all transactions are public. While the government has had some success tracking down the folks who ran the illegal drug marketplace Silk Road, that sort of effort would be overkill (not to mention impractical) for enforcing tax payments.

      -Dave Zeiler, Associate Editor, Money Morning

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