5 Things We Learned From the IRS

IRS

If 2013 was the year Bitcoin caught the world’s attention, 2014 will be the year the world actually figures it out—from users to investors to regulators. Cryptocurrencies have officially arrived—but how will they fit into our dollar-denominated reality? Incidentally, this week’s IRS guidance unwittingly provides a roadmap of how the year might play out.

1. The old rules still apply

We saw this with the takedown of the Silk Road as well. When it comes to government enforcement, the current regulatory framework can still be effective even if it isn’t always optimal.

The IRS is following the same playbook. Rather than redefining the rules, cryptocurrencies will be treated as something we’re already familiar with—in this case property or stocks. Taxation was always on the cards and providing clarity is a beneficial first step.

2. But they could be a lot smarter

It’s also just, a small first step. As many have observed, classifying cryptocurrencies as property is immediately problematic. When every retail transaction counts as a tax “event,” spending bitcoins suddenly becomes a huge nuisance—at least if you don’t plan on breaking hte law. Foreign currencies have an exemption for retail purchases to avoid this very headache.

Because Bitcoin isn’t a foreign currency. It isn’t property either. In truth, cryptocurrencies are their own thing and as such, presumably require a classification that fairly and efficiently takes that into account.

3. Regulators are paying close attention

We can also safely bet that it’s in the works. FinCEN and the IRS have now both released guidance. The CFTC contemplating stepping up to the plate. The US Treasury and the Department of Homeland Security are understandably both keeping an eye out. Then there’s Superintendent Ben Lawsky leading the charge in New York.

The government’s commitment is not only a ringing endorsement for the relevance of this potentially groundbreaking technology, it opens the door for big business. Now that Silicon Valley is starting to bite, is Wall Street next?

4. New opportunities arise

As the crypto landscape continues to mature and regulators catch up, the next growth industry within the ecosystem may very well be accounting and auditing. When a task is deemed “annoying,” users and corporations will happily outsource it.

And with millions at stake, companies will inevitably invest in compliance. Beyond following the rules to avoid legal trouble, proper auditing lends brand credibility—no one wants to be perceived as the next MtGox. In all likelihood, it’s only a matter of time before enterprise-level solutions replace Stefan Thomas. For now, those services simply don’t exist.

5. The bitcoin community is at a crossroads

There remains a vocal contingent of the cryptocurrency movement that hasn’t yet come to terms with these developments. “I’m totally not interested in learning these rules,” says the author of the top comment on a thread outlining the IRS guidance the bitcoin subreddit, perhaps the largest and most visible online crypto-community. “You know why? Because I have no intention of obeying them.”

Of course, failure to pay taxes is illegal. Just ask Wesley Snipes, who served three years behind bars. It’s a perspective shared by most developed nations. Earlier this month, Uli Hoeness, president of European champions Bayern Munich, was convicted of tax evasion and sentenced to 42 months in prison. For certain Bitcoiners going forward, they’ll have to decide whether they want to join the rest of the world—which means playing by the rules—or live in their own.

Photo: Ray Tsang