VodkaPundit

Taxing Bitcoin

Bitcoin is a commodity:

So says the Commodity Futures Trading Commission (CFTC), which on Thursday announced it had filed and settled charges against a Bitcoin exchange for facilitating the trading of option contracts on its platform.

“In this order, the CFTC for the first time finds that Bitcoin and other virtual currencies are properly defined as commodities,” according to the press release.

While market participants have long discussed whether Bitcoin could be defined as a commodity, and the CFTC has long pondered whether the cryptocurrency falls under its jurisdiction, the implications of this move are potentially numerous.

By this action, the CFTC asserts its authority to provide oversight of the trading of cryptocurrency futures and options, which will now be subject to the agency’s regulations. In the event of wrongdoing, such as futures manipulation, the CFTC will be able to bring charges against bad actors.

If a company wants to operate a trading platform for Bitcoin derivatives or futures, it will need to register as a swap execution facility or designated contract market, just like the CME Group. And Coinflip—the target of the CFTC action—is hardly the only company that provides a platform to trade Bitcoin derivatives or futures.

Good luck with that.

Let’s say you trade in bitcoin, the value of which fluctuates just like any other commodity.

Each bitcoin, or fraction of bitcoin, is just like any other. Like a bucket full of dimes, they don’t carry any serial numbers. But like a lineup of gallon gas jugs bought and filled up over time, each may have a different dollar value.

Let me try and clear that up further.

Let’s say you’re paid by your forward-thinking employer in bitcoin. Let’s say the first bitcoin he paid you at the beginning of the year your first month’s wages added up to 38 bitcoin — about $5,000.

Now in December you’re paid the same 38 bitcoin, but now the dollar value is $6,000. In between, the value fluctuated from as low as $4,000 to as high as $7,000.

Mostly those fluctuations didn’t bother you any, because you make most of your purchases from other bitcoin users. You take out a little each month in US dollars for things you can’t buy (yet) with bitcoin, or — and this is important — to pay your taxes.

If bitcoin is a commodity, did you take a loss or earn capital gains?

Both!

Throughout the year, some of your bitcoins lost dollar value during the time you held them, while others appreciated — just like those gallon jugs of gas.

But which ones did you spend? Which ones did you save? You could make the reasonable claim that you only spent the low-dollar-value bitcoin, and took big losses when they failed to appreciate. The IRS could make the equally reasonable claim that it was the other way around and you owe big capital gains.

But like that bucket full of dimes, there’s no way to tell one from the other.

So how does the IRS figure out how much you owe in taxes? Or how do you figure how much you can write off?

It’s a brave new world, and there might not be any good answers.