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Image: http://www.flickr.com/photos/zcopley/

Image: http://www.flickr.com/photos/zcopley/

In a post on the Bitcoin Foundation’s blog yesterday, Marco Santori, Chairman of the foundation’s Regulatory Affairs Committee responded to the recent decision by the Internal Revenue Service (IRS) to treat bitcoin as a stock-like class of property, rather than as a currency. The post notes that the foundation “appreciates the IRS’ hard work in providing much-needed clarity” to how virtual currencies are handled, and welcomes the “greater regulatory clarity” for the community.

Santori went on to note the many problems that the decision will cause for the bitcoin community at large.

[Tax] treatment of Bitcoin as a property, and not a currency, may make compliance with tax laws unnecessarily cumbersome and imposes untenable recording and reporting requirements on its users. This is an unwelcome result for most bitcoin users, but is particularly detrimental to those that Bitcoin can help the most: small business and underbanked individuals.

One major issue is that bitcoin is currently used by many much like actual currency, rather than simply being held as an asset or investment. While it is true that many bitcoin owners are at least partially speculating in an eventual rise in value, that’s not the actual purpose of bitcoin; it’s a side effect.

When it is used as a currency, Bitcoin should be a frictionless means of paying for goods and services. The tax laws currently permit individuals to ignore small gains and losses in foreign currencies. Similar treatment for digital currencies would harmonize the law with the way most people actually use digital currencies. Artificially characterizing this use case as a transaction in property would make one of the most innovative features of this technology hard to use for those who wish to be compliant.

Perhaps the biggest problem with the ruling, Santori says, is that it was made without feedback from the bitcoin community.

IRS did not, in particular, seek meaningful input from the digital currency industry or the public at large. As a result, the guidance creates a poor framework for innovation. To the extent that the tax code compelled this unwieldy outcome, a more open process would have identified the limitations of the statutory language and facilitated a dialogue between IRS and the appropriate legislators to address those limitations.

As the de facto lobbying and advocacy group for all things bitcoin, it’s likely that the foundation and other representatives will eventually meet with policymakers in Washington about how virtual currencies are treated in the analog world. Until that happens, however, it’s appears that the IRS sees us all as shareholders in the largest distributed public company the world has ever seen.

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