The United States Internal Revenue Service, IRS, has ruled that Bitcoins are property and not a currency. This means that there will be taxes on Bitcoins when they are sold, providing the sale is a realized capital gain. Prior to the new era of taxes on Bitcoins, one could purchase Bitcoins with dollars, receive Bitcoins from a patron at your restaurant, or trade bitcoins on a Bitcoin exchange. This option was recently in the news as Mt. Gox, the Bitcoin exchange located in Tokyo, went belly up and declared bankruptcy a few weeks ago. The issue for the IRS is that some folks managed to buy Bitcoins for a few cents and eventually get rid of them for a thousand dollar each and not pay any taxes. The IRS figures that Bitcoins should be treated like any other investment or traded asset. If a trader buys IBM stock when it is low and sells IBM stock when it is high the trader pays capital gains. The tax may by on short term gains if the stock was held for a year or long term gains if the stock was held for more than a year. Now there will be taxes on Bitcoins following similar rules, when they are sold.
One of the attractive aspects of Bitcoins was that one could, theoretically, buy, sell and make a profit under the radar. After all, one was simply buying and selling a currency. However, when you convert one currency into another and then back as a currency trader you are liable for taxes on the gains that you have made and are able to write off losses against other income. Taxes on Bitcoins will likely follow similar rules. Technical analysis can lead to profits in trading and that could include Bitcoins. There are some who say that the IRS ruling just means that Bitcoins have grown up and entered the adult investing and trading world. The opposing view is that the world of Bitcoins is unregulated and simply amounts to a big Ponzi scheme and a story that is simply too good to be true. However, traders can make money in good and bad markets. Many who saw the dot com bubble coming or accurately anticipated the 2008 crash made money by purchasing puts on stocks or shorting stocks. There are lots of profitable day trading strategies that could be applied to trading Bitcoins in a transparent market. The trick is not to fall for the free lunch concepts that Bitcoins will go up in value forever or that there are not taxes on Bitcoins in the end.
Bitcoins in Trade
One of the ideas behind Bitcoins was that one could use them to buy things just like with other currencies. To the extent that Bitcoins could be used as an international currency this was an attractive idea. However, now the IRS says that Bitcoins are property. This means that each time you pay for something with Bitcoins you need to calculate what your Bitcoins were worth in US dollars when you got them. Then you need to calculate what your Bitcoins were worth in US dollars when you used them for a purchase. The difference will be your capital gain on your Bitcoin property. Obviously you will need to check with the IRS on the particulars. But our point is that the taxability of Bitcoins complicates their use in commercial transactions even while it may legitimize their tradability as property. The idea of a contrarian approach to day trading certainly applies to using or trading Bitcoins for the foreseeable future.