How the IRS Shot Itself in the Foot with Its Bitcoin Guidance

The IRS just gave you a BIG tax refund.


If you've ever enjoyed laughing with an evil laugh, now's the time for a good, "Bwahahahahahahaha!"

Why?

Because the IRS just gave you and I the biggest immunity to taxes we will ever get in our entire lives.

Say what?

The IRS has ruled-without any laws to back it up-that bitcoin is a form of property. They have declared by government fiat that it is not a currency. Of course, this directly contradicts an earlier ruling by a federal court

But setting that ruling aside, the IRS intended to make bitcoin very difficult to use by requiring bitcoin users to file a 1099s form on every transaction and pay capital gains tax.

But like most government efforts, the IRS guidance on bitcoin has backfired. The IRS is now giving away money.


Bitcoin is Deflationary

To understand what's happening here, it's important to know that bitcoin is a deflationary form of money. That is, the value of bitcoin itself tends to rise.

All of the currencies derived from bitcoin, which are referred to as alternate coins or altcoins, are also deflationary. They all tend to increase in value over time.


Inflation Anyone?

But what if the value of bitcoin and all altcoins went DOWN over time?

It's easy to make a digital currency that is inflationary. All you have to do is make sure that your digital currency always issues more money than the market can handle.

Isn't that bad?

Well, normally, the answer would be yes. But in this case, the IRS has given you a way to make money off of your taxes by using an inflationary altcoin.

Suppose you created an altcoin that was designed to inflate by 3% a year. That is the inflation rate that the government is currently reporting for the US dollar (the actual inflation rate is 6%-9%, but we won't fuss over that now). Let's call our inflationary coin DollarCoin.

Now suppose that you have a whole bunch of DollarCoins. The value of your money is going down. But the IRS doesn't see it as money. Instead, the IRS sees your DollarCoins as property and you must pay capital gains.

But wait, if there's a 3% inflation rate in DollarCoins, that means they're losing value each year. And here's the fun part:

You get to deduct that lost value from your taxes!

If you want to break into a really loud, "Bwahahahahahahaha!" go right ahead.


Incentivizing Altcoins

By declaring digital cash to be property, the IRS has provided an incentive to use it because it can lead to rebates on your taxes.

It's true that you must still report all transactions to the IRS. But you are getting a 3% discount on each transaction, so you have a good incentive to report them. Also, it's just a matter of time before someone comes up with wallet software that will handle all of the reporting problems for you. It will all be automatic. So at the end of the year, you'll just tell your wallet software to print the reports and you'll send your reports to the IRS for your annual rebate. Goodbye taxes.

This tax advantage makes inflating altcoins a really great investment. Businesses now have a strong incentive to accept any altcoin that will steadily inflate. The IRS may just have created the largest tax loophole in history.

"Bwahahahahahahaha!"

© Cognisaya 2013-2015


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