Chomping at the Bit
There’s been a lot of wide-eyed wonder surrounding Bitcoin these days. A peer-to-peer payment network, Bitcoin has managed to attract tech geek data miners, online black markets, venture capitalists, and the Winklevoss twins (the former friends of Facebook’s Mark Zuckerberg).
Pundits applaud Bitcoin’s possibilities for emerging markets. The online retailer Overstock.com just announced it will begin accepting payment in Bitcoin sometime next year. And according to the Los Angeles Times, a Newport Beach, California, city council candidate will accept political donations in Bitcoin. It may even become an official currency, if one Native American activist has his way. Forbes reported that Payu Harris wants residents on reservations to use Bitcoin instead of the U.S. dollar.
So what does the future hold for Bitcoin? Regulation, that’s for sure.
Earlier this month the European Banking Authority cautioned consumers concerning virtual currencies. It ominously warns, “you need to be aware of the risks associated with virtual currencies, including losing your money.”
Norway will not recognize Bitcoin as legal tender and will impose a capital gains tax on it. That news was quickly followed by China’s announcement that Chinese financial institutions and payment firms will not be allowed to accept Bitcoin as payment. A freefall in the value of Bitcoin ensued. See, e.g. Bloomberg.
U.S. regulators have also been close scrutinizers of virtual currencies. In March, the Financial Crimes Enforcement Network (“FinCEN”) issued guidance on the Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies. Depending on how businesses interact with Bitcoin and its cousins, they may be subject to FinCEN’s registration, anti-money laundering, recordkeeping, and reporting responsibilities.
The SEC has also been hot on the trail of potential fraud involving Bitcoin. It sued Trendon T. Shavers, the founder and operator of Bitcoin Savings and Trust, for allegedly operating a Ponzi scheme using Bitcoin-denominated investments. The SEC also issued an investor alert to warn consumers about fraudulent investment schemes that may involve Bitcoin and other virtual currencies.
And the Government Accountability Office has gotten involved, issuing a report in May on virtual economies and currencies. The report describes the tax reporting requirements for virtual economies and currencies and assesses how the Internal Revenue Service has addressed the tax compliance risks of virtual currencies. GAO notes that because of uncertainty concerning the extent to which virtual currency is used, the IRS made a reasoned decision not to make virtual currency compliance with applicable tax laws a priority. Given the growth in use of virtual currencies, however, the IRS is beginning to take notice.
The tax man cometh: Will wonders never cease?