Digital Transactions Authoritative, insightful and timely information for payments professionals
By Linda Punch
Those looking for the U.S. Internal Revenue Service to give Bitcoin legitimacy as a currency when the agency issued its guidance earlier this week were sorely disappointed. The IRS said the digital cash will be taxed like property, not currency. But the quest for legitimacy may be gaining support from another quarter: a new Bitcoin identity security network announced Thursday by Jumio Inc.
In its guidance issued on March 25, the IRS proposed that Bitcoins and other virtual currencies be treated as an asset or commodity, similar to stock or gold, rather than as a pure currency. That means the digital cash, depending on the circumstances, will be taxed either as ordinary income or as assets subject to capital-gains taxes.
If the virtual currency is held as capital like stocks or other investments, gains and losses are treated as capital gains or losses, the IRS said. But if it is held as inventory or other property for sale to customers in a trade or business, ordinary gains or losses are incurred.
Bitcoins and other virtual currencies cannot be treated as legal-tender currency to determine if a transaction caused a foreign-currency gain or loss under U.S. tax law, the IRS said in its guidance.
Regulators, law-enforcement officials, and lawmakers typically have viewed virtual currencies such as Bitcoin with suspicion, noting their non-traditional structures and that money launderers, drug dealers, and other criminals often use such payment forms to avoid detection. Bitcoin is a decentralized digital-payment system based on mathematically derived new Bitcoins coming into circulation by so-called miners using computers. The IRS guidance is among recent government regulatory activities to shed light on how Bitcoin and other currencies fit into overall financial system.
Under the IRS guidance, a taxpayer receiving virtual currency as a payment for goods or services must, in computing gross income, include the fair market value in U.S. dollars from the date the virtual money was received to the date it was spent. Previously, Bitcoin users were able to buy, sell, and trade on gains with little oversight since the currency has no government regulator or central-bank sponsor.
In addition, the IRS said Bitcoin miners must include the fair market value of new Bitcoins created as gross income as of date of receipt.
While some observers see the IRS guidance as a form of legitimization of virtual currency such as Bitcoin, Baltimore-based payments consultant Beth Robertson disagrees. “This guidance is not about legitimacy or lack of it,” Robertson tells Digital Transactions News. “It is about adding protections against money laundering and potential defrauding of the government. The IRS guidance still clarifies that Bitcoin is not a legal tender.”
But the treatment of Bitcoin as property as opposed to currency is a benefit for Bitcoin holders, Robertson adds. “The tax rate that is applied to capital gains on property is typically lower than the rate for income so it may act as a tax shelter for holders of the currency,” she says.
In terms of Bitcoin’s use as a payment method, Robertson sees the IRS guidance having little impact. “The IRS ruling regarding the tax implications is distinct from whether it makes sense to use it or accept it as a payment mechanism,” she says.
While the IRS grapples with the tax implications of Bitcoin, a group of industry players today announced the formation of the Jumio Bitcoin Identity Security Open Network (BISON). Eight Bitcoin exchanges, wallets and ATM providers worldwide are joining Jumio, a Palo Alto, Calif.-based credentials-management technology company, in the network. Initial participants include BitAccess, SnapSwap, CoinMkt, Digital Currency Exchange of Texas, CoinRnr, Hashop.io, NoveltyLab, and Bitnet Technologies.
Customers using the BISON network for Bitcoin transactions hold up their driver’s licenses or passports to their mobile device’s camera for scanning by Jumio’s Netverify technology. Netverify in real time validates the ID, extracts the personal information it contains, and populates the transaction form. The buyer’s identity is used solely in relationship with the exchange or wallet and does not change any aspects of the Bitcoin transaction flow, according to a Jumio news release.
The network this summer plans to add functionality that will enable an opted-in, validated customer on one exchange to be automatically validated on another without rescanning their ID. BISON members also will receive periodic reviews of fraud trends within the network.
“The vast majority of Bitcoin users are honest and engaging in a range of legal transactions, but a small minority are not and that threatens the entire ecosystem, especially during this formative period,” Jumio founder and chief executive Daniel Mattes said in the release. “BISON is designed to minimize the problem by weeding out those who use false or manipulated IDs, which is a strong indicator of intended fraud or other illegal activity.”
