Bitcoins, Taxation and Hedges

I am referring to the two major bitcoin-related developments that happened this week of course.

First, the first ever bitcoin swap agreement took place.

It would work like this: An institution would ensure that a company accepting bitcoin for payment gets a predetermined exchange rate, regardless of the actual exchange rate at the time the payment is due. If the price of bitcoin has dropped during the period, the institution pays the difference. If the price has risen, it books a profit.

Second, the IRS ruled that bitcoin is property, not currency.

Under its new ruling, the IRS proposes treating the digital cash as an asset or commodity, such as a stock, instead of deeming it a pure currency, such as dollars.

So what does this mean for us? Well, it is a way forward to the legitimization of the currency (or property, I guess, if you are a tax guy). What has now been operating largely unregulated and sort of in “underground” pockets is now getting more mainstream.

By actively engaging with state, federal, and international authorities now, Bitcoin proponents can (1) speed the development of the clear rules and infrastructure necessary to support a Bitcoin market ecosystem; (2) help tailor those rules and infrastructure so that they work with Bitcoin’s development, rather than inhibit it; and, perhaps mostly importantly, (3) use government oversight as a way to establish Bitcoin’s credibility as a system for everyday public use.

It is this last point that may actually be the most important. People will only use financial systems if they are confident in its legitimacy. [link]

This may not be fun for those users who enjoyed the lack of regulation. Nor for those who dealt with bitcoin because they were disillusioned with governments’ reaction to the 2007 financial crisis. But it is definitely going to be interesting to see how this develops.

On the positive side, it certainly is good news for the numerous apps, software and hardware manufacturers and sellers that are associated with bitcoin. This legitimization means that their businesses will likely survive.

Incidentally, I was quoted in the Christian Science Monitor article linked to, above.


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