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Sunday, January 25, 2015

Federal Government Bets on Bitcoin





In 2014, the IRS released a document outlining how they plan on taxing Bitcoin. The document, titled NOTICE 2014-21, lays out the foundation of their policy with treats Bitcoin like property. Choosing this method of taxation maximizes the revenues the governments receives from Bitcoin miners as long as the price of Bitcoin is rising (relative to USD). We will present a quick example to show the annual tax haul of the federal government in two scenarios, one in which the relative value of BTC to USD is falling, and the other in which BTC to USD is rising.

Scenario 1: Bitcoin loosing value against the dollar




Current Regulation:
INCOME TAX + CAP GAINS = $0

Potential Regulation:
CAP GAINS only =$360




Scenario 2: Bitcoin gaining value against the dollar



Current Regulation:
INCOME TAX + CAP GAINS = $1,365

Potential Regulation:
CAP GAINS only =$1,020




 

Why Should I Care?

  We all want to know yesterday exactly how Bitcoin is going to be regulated in the US and how it is treated for taxation can indicate if the federal government thinks Bitcoin will survive. In a market where the value of Bitcoin is spiraling down into oblivion, under current tax schemes, the federal government will tax miners basically nothing. However, if Bitcoin goes up in value instead, the taxes are 30% above what they would have been under a capital gains only rule. I think the federal government is on a spending binge and they are looking for revenue anywhere they can find it. And with the current tax regulation, they are betting on Bitcoin going up! Thus, for all the rhetoric about how Bitcoin is bad and helps people do bad things (ie. helping move money from conflict avocado sales south of the border), the federal government wants a slice of that sweet sweet Bitcoin Pie.

 Assumptions.

  Single household that has an income tax of 30% (fed+state) & capital gains of (20%), mining produce 0.5 BTC / month and cost 60 USD / month to operate. BTC are all exchanged for USD at the end of the year. Hardware deprecation effects are not included. BTC holds price steady after the end of the year and long term capital gains are applied to sales.