Government and business are paying more and more attention to cryptocurrencies like Bitcoin. The way they’re going to get the investors may not be what you think.
A man walks past the Bitcoin ATMs in Hong Kong, Thursday, Dec. 21, 2017. Bitcoin is the world’s most popular virtual currency. Such currencies are not tied to a bank or government and allow users to spend money anonymously. They are basically lines of computer code that are digitally signed each time they are traded. (AP Photo/Kin Cheung)
The flashy cryptocurrency news involves ICOs – “Initial Coin Offerings” – put out by businesses, creating public ownership of startups without the middleman, and without any of the regulation government imposes there.
But that’s now how they’re going to get the masses involved with Bitcoin. No, they’re going to get you the old fashioned way, with taxes:
Initially, the IRS sought records related to all of Coinbase’s more than one million customers. Its demand subsequently was limited to those accounts that conducted bitcoin transactions worth $20,000 or more, which applied to approximately 8.9 million transactions conducted by more than 14,000 Coinbase customers.
The IRS won, and Coinbase sent along that information. You may think that transactions worth $20,000 would limit the scope of this to fairly wealthy people, but that’s not the case. Someone who bought two Bitcoin for $900 in May 2016 ended up with an asset with a paper valuation of $30,000 or more in December 2017. Anyone who sold at that point wound up with a massive capital gain.
How many people do you think reported that income? How many do you think simply spent the money, possibly on something like a house or a car, a lifestyle change not easily liquidated? Or paid off debt with that money?
When the IRS comes knocking on the doors of these investors for thousands of dollars, then the Bitcoin windfall becomes disaster.
And it gets worse than that. What happens to the person who spent $900 on 2BTC in 2016, who then traded Bitcoin for a new currency like Ethereum, thus seeing a capital gain in Bitcoin, but then losing money back in both Bitcoin and Ethereum? What happens when the IRS comes knocking for a cut of a windfall that no longer exists?
When the IRS comes looking for a cut of every upswing of the cryptocurrency roller coaster, that could make everyone go broke.