Should Bitcoin be taxable? The question is a ticking time bomb, worthy of a fiery debate. Most people in the bitcoin community believe that the digital currency should not be taxable, as the founder(s) had originally intended. Bitcoin was created as an alternative currency that can be used for peer to peer transfer without the interference of external entities. The decentralized nature of the digital currency made sure of it.
However, as the popularity of the digital currency increases, the governments have come to realize the true potential of bitcoin as an alternative economic system that jeopardizes the existing financial ecosystem as we know it. The governments rely upon the taxes paid by the citizens for its functioning. While there is no escape from taxes in a traditional monetary system, the use of bitcoin among people has led to few governments imposing taxes on bitcoin as well.
The United States of America is probably the first country to come up with complicated taxation regime that makes bitcoin taxable. While the Internal Revenue Service, the US taxation agency classified bitcoin as an asset back in April 2014 and since then the regulations haven’t been updated, creating a lot of confusion among the bitcoin community in the country.
The increased confusion has forced the American Institute of CPAs to send a letter to the IRS seeking clarification. According to reports, the letter seeks clarification on 10 issues related to digital currencies which otherwise may create audit issues.
Currently, the taxation regime makes Bitcoin holders eligible for favorable capital gains tax rates for their digital currency holdings older than one year. Any losses made during the period due to the volatility can be used to offset the gains. However, the IRS hasn’t been clear about people spending digital currency to buy goods and services. Even if the taxation department considers taxing these transactions, it will become too cumbersome to keep track of all expenditures and classify them as investment gains or losses.
Apart from small transactions involving digital currency, some of the other aspects of bitcoin usage that lack clarity from IRS includes the tax exemption status for bitcoin donations to charities. While the American Institute of CPA waits for a response, some of the institutions continue to accept bitcoin from their customers and donors. We can expect them to make necessary changes once it is clarified.