IRS ruling deals another blow to Bitcoin as a mainstream currency!

title insurance, New York,New York City,Long Island,Michael HaltmanThe trials and tribulations of the cyber-currency Bitcoin have been documented here over the past few months including doubt that this alternative payment system would catch-on in the world of real estate!

On February 11, 2014, in the wake of the restrictions placed on Bitcoin account withdrawals at exchange Mt. Gox (subsequent to this the exchange filed for bankruptcy protection), we wrote the following:

It was only 10-days ago in an article here, ‘Bitcoin and real estate transactions! (Video)’, we posited that Bitcoin at some point could become a standard and accepted currency to use in real estate transactions! 

Now, however, turmoil has struck this decentralized non-currency store of value as two major players in the marketplace have put restrictions on the ability of Bitcoin owners to withdraw money from their accounts.

This freeze caused an immediate 20% drop in the market value of Bitcoin but even more importantly created a crisis of confidence for investors in a market where certainty is an absolute must!…‘ (Update: Is Bitcoin coming unglued?)

Now the IRS has issued a decision stating that Bitcoin is not currency, it is actually property. This opinion opens up the potential for the users of Bitcoin and those who accept it as a form of payment to face accounting issues for every use.

This would not be that big of a deal if you use or accept Bitcoin a few times a year, but imagine the following example as to what mainstream use of this cyber-currency would mean if Bitcoin actually needs to be accounted for as property:

Purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of gross income for the coffee shop.

Extending this argument, think about what this ruling would mean in a real estate transaction where the property buyer using Bitcoin would face paying capital gains on the appreciation in the price of their Bitcoin from the time of the currency’s purchase to the day it was used as the currency for the property.

This could add a great deal of cost to their transaction making the use of Bitcoin unviable unless of course the owner of the Bitcoin would face a loss and not a gain.

Complicated and unwieldy? Not the attributes of a mainstream currency!

The financial markets result of the IRS ruling? Bitcoin, that had been trading in the mid to upper $500 range even after Mt. Gox, is now below $500. More detailed information is available at Bloomberg here.


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Content created by Michael Haltman

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