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As with anything new, there will be problems; many arising simply because there is no precedent to follow. Since their conception in 2009, Bitcoins have continued to be a source of constant speculation and discussion among everyone from world financial leaders all the way down to the local corner businessman. Today many experts believe this most popular form of cyber-currency will continue to not only survive but thrive. Increased acceptance by retailers, coupled with recent federal and state regulations, indicate the tide has turned on digital currency as a mainstream alternative to standard government backed tender.
When the Internal Revenue Service published document IR-2014-36 referencing IRS Notice 2014-21, detailing new taxation guidelines for virtual currency, the most surprising aspect was the federal government categorizing digital money as property rather than legal tender. Because of this ruling any profits made through Bitcoin transactions, including investing and Bitcoin mining and exchange income, the same general property tax transaction principles already in place must be followed.
In spite of, or perhaps because of the IRS tax definition of cyber-currency, retailers and service providers are continuing to jump on the Bitcoin bandwagon in record numbers, many without exploring the impact of legitimate legal concerns.
Obviously one major element of concern is unlike traditional paper and coin money, there is nothing backing Bitcoins value. Someone could argue Bitcoins are essentially worthless, opening up both retailer and customer to potential legal action. This could easily come to fruition if Bitcoins faced a sudden devaluation or drastic fluctuating exchange rate.
Because Bitcoins have no tangible presence and are completely technology based the opportunity for fraud is a constant threat. An Internet thief could set up a private Bitcoin account, hack an accounting system, divert payments and fade back into the murky waters of the Web before anyone realizes there is a problem.
Due to the volatility of Bitcoin pricing along with the fact all transactions are final and irreversible, a business or service provider much be vigilant to constant value fluctuation. Strict return and exchange policies must be clearly spelled out or it is conceivable a business owner could find themselves in small claims court. For example, a customer purchased merchandise with one Bitcoin worth $500. Two weeks later the customer decides to return the merchandise and get his money back. But now the value of a Bitcoin unit has decreased to $300 or potentially increased to $700 and since Bitcoins must be traded in full units, one of the parties is going to lose $200.
Much like a cash transaction doesn’t leave a tangible paper trail, Bitcoins don’t leave an obvious online trail in the case of theft, fraud or money laundering. Coupled with the anonymity factor Bitcoin has created a new sector of online criminals selling everything from illegal drugs to stolen goods. In fact, recently Silk Road founder, Ross W. Ulbricht was sentenced to life in prison for his role as “the kingpin of a worldwide digital drug-trafficking enterprise.” The federal government shut down the Silk Road website in 2013 and federal prosecutors have publicly stated Ulbricht, “developed a blueprint for a new way to use the Internet to undermine the law and facilitate criminal transactions.”
While there are many legitimate Bitcoin exchanges online facilitating the sale of these virtual coins, there are probably just as many, if not more, looking to get rich quick. In July, 2013 the Securities and Exchange Commission charged Trendon T. Shavers, of the now shuttered Bitcoin Savings and Trust with operating a worldwide Ponzi scheme using Bitcoin market arbitrage activity to promise investors weekly interest rates of up to seven percent.
Shavers was arrested and charged with securities fraud. His defense was since Bitcoins aren’t actually legal United States currency under IRS guidelines, he could not be charged with a crime. United States magistrate judge, Amos L. Mazzant quickly shot down that line of reasoning, ruling that virtual currency was in fact, a viable form of money. While in direct conflict with an earlier Financial Crimes Enforcement Network ruling, Mazzant’s decree showcased how courts and federal regulators while familiar with how certain rulings fall under the existing legal regimes, still had, and currently have, much work to do on coming to terms on both the specifics and the definition of digital currency.
Perhaps as an entrepreneur you are drawn to new technology and believe fluctuating value and the potential for Internet fraud or theft is just part of doing business. Your accountant has researched federal, state and local tax regulations as they pertain to digital money and you feel confident being on the cusp of this cutting edge financial format is still worth the risk.
Just keep these last things in mind; many financial managers and CEOs don’t take into consideration liquidity and how “putting all your eggs” in the Bitcoin basket could affect your bottom line depending on need and fluctuation. Then, while the IRS currently has guidelines in place doesn’t mean as Bitcoin continues to grow in popularity, these regulations won’t change. As governments around the world, including here in the United States, see cyber-currency thrive, the more interest will be taken in regulating, taxation and criminal conduct.