Over the last several months, we have had numerous questions as to our views and thoughts about Bitcoin and all other virtual currencies. My company team has spent countless hours digging into Bitcoin and the alike. Please note: I do not personally endorse Bitcoin or any other virtual currencies. Continue to read below to hear my findings.
According to the IRS, “Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”
Part of this statement is true and part is false, but we’ll get to that later.
I have written before about China’s attempts to become the new world currency, however, I don’t think it is the dollar that will pose the greatest competition. China, and every other country for that matter, will have to adapt to or compete with the new world of cryptocurrencies, also known as virtual currencies (VC).
As VC’s continue to evolve, a poorly regulated and, in my opinion, unsustainable system is being uncovered wherein millions of dollars will be made by some and lost by others.
The market for VC’s is exploding and each VC is reacting differently. There have been some that have been marked as ponzi schemes while others have gained incredible traction. Bitcoin, for example, has increased in one year from $703 to $7420 — a 955% increase! That type of increase seems unsustainable since there is no support if the market value were to head the other direction. Seeing that VC’s are all relatively new, it is also impossible to gauge bubbles. It is in my opinion that there is a definite bubble going on with Bitcoin… Or as I call it, “fool’s gold.”
Retail consumers and businesses are currently able to trade with cryptocurrencies in certain arenas and the popularity of these types of transactions is growing at a fast pace.
One distinction to remember is that VC’s are not considered legal tender in any jurisdiction. This should give pause to anyone deciding where to place wealth. I dabbled in the cryptocurrency world in its birthing stages and can share from firsthand experience that it is a high-risk investment for the average investor.
One high risk factor is the that many entities view them in different ways. The U.S. Treasury classified bitcoin as a convertible decentralized VC way back in 2013, and in 2015 the Commodity Futures Trading Commission classified bitcoin as a commodity. Meanwhile, the IRS views bitcoin and other VC’s as “property.”
The IRS views VC’s as property because of how they are taxed, which happens to be quite cumbersome. When you spend bitcoin or other VC’s you are really executing two transactions wrapped into one: “disposing of the VC, then turning around and spending its valued equivalent in dollars.” Whenever bitcoin or any other VC is bought, sold, or traded, there are tax implications. This requires detailed records of any value gained or lost during your possession of it. On the flip side, when receiving VC as a form of payment, it is subject to income tax just as any other form of payment would be. Every time you transact with a VC you need to keep accurate records of its current value at the time of the transaction as well as report it in USD on federal returns. That means that capital gains apply in between every transaction. This happens to be my largest hang-up on Bitcoin and the other currencies. Seeing Bitcoin is well over $5,000 per coin, the likelihood of spending more than $5,000 of Bitcoin per transaction is slim. Therefore, you have to keep track of “fractional” bitcoin and their values for tax implications. This appears to me as an IRS audit haven, especially when billions of dollars have been earned virtually overnight.
Another note-worthy issue with cryptocurrencies is that they are anti-wall street, anti-cash, and anti-central bankers. While I don’t believe these are negative qualities in themselves, the problem could arise with continued attempts at further regulation and government involvement as its many branches attempt to agree on classification. The next logical question is, will the VC you have invested in be one of the “cryptos” that survives? Or will the federal reserve, banks, and other governments impose their own VC, rendering yours value-less?
Let’s revisit my first question. Where did the IRS go wrong in their definition?
“Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”
The error was in stating that VC is a store of value — in reality, it is the furthest thing from it. VC’s are only valued upon public faith. Rather than a store of value, they are more like our dollar, just further digitalized. Both are fiat and backed by nothing, just like fool’s gold isn’t real gold. It may look like gold to some, but is it really worth any more than a shiny rock?
Gold and silver, on the other hand, are true stores of value that have stood the test of time. Even though I have some dollars allocated into VC, I still maintain the stance of investing 15% or more of my wealth into true, tested stores of value: gold and silver.
Call or email us today to discuss offering gold and silver to your clients. This is an important part of their portfolio that they can have in their possession. They can touch, see, and feel what they are investing in and it will not only protect their purchasing power, but also the legacy that they leave to their future generations.