A new controversial currency, bitcoin, is a widely discussed topic nowadays. While the bitcoin skeptics point towards the vulnerability of the system and criticize the lack of a central authority, the adherents claim bitcoin to be the currency of the future. For example, Bill Gates advocates this new type of money by stating that“bitcoin is better than currency”.
Bitcoin differs from traditional currencies in three aspects. Firstly, it is entirely virtual. Secondly, bitcoin does not have a central point of control unlike the conventional money. Thirdly, bitcoin is distributed through a peer-to-peer system and managed by the bitcoin network. Bitcoin technology is easily accessible and can be reached through various computing devices, including laptops and smartphones.
Currently, bitcoin can be used for purchasing a variety of goods and services, starting with software and computers (e.g., bitcoin is accepted by Apple, Microsoft, and Dell) and ending with household items (e.g., Overstock and Ebay). Although the number of retailers that accept bitcoin is still limited, the list of dealers is continuously expanding. A major portion of bitcoin payments is managed by third party payment processors that convert bitcoins into regular currency.
Currently, 1 bitcoin equals to about $233. However, the price of bitcoin fluctuates greatly. The highest value of bitcoin was recorded in November 2013, when 1 bitcoin costed more than $1200.
Bitcoins are generated through mining, a process similar to a giant lottery where miners compete with their mining hardware with everyone on the network to earn bitcoins. Approximately every 10 minutes, one of the miners is awarded with an amount of bitcoins. Bitcoin generating system inspires bitcoin fans to use powerful computers or even to hack other people’s computers for benefiting from bitcoin mining.
In order to start using a bitcoin network, one should install software called bitcoin wallet on a computer or a mobile phone. It does not require any technical knowledge. The installation of software generates a bitcoin address necessary for making payments.The user then is allowed to purchase and sell bitcoins on bitcoin exchanges or pay for goods and services.
There is also a growing interest to use bitcoin as an investment. Since bitcoin is not yet stable and its prices fluctuate, the investors can obtain a significant profit. The most common investing approach is to buy some bitcoins and to sell them on the right moment as the price rises. For example, a Norwegian man bought 5000 bitcoins in 2009, the year when bitcoin was released, for a total amount of $27. The man forgot about his investment until 2013, when media messages jogged his memory. The person was surprised discovering $880.000 in his bitcoin wallet. The earned money was invested in a more stable real estate market – the person bought an apartment in a good neighborhood of Oslo.
Bitcoins can be sold and purchased through a variety of software, the so-called bitcoin wallets. The software is designed to be used on both mobile and desktop devices.The bitcoin transactions are also conducted through bitcoin exchanges, such as Bitfinex(https://www.bitfinex.com), Bitstamp (https://www.bitstamp.net), or Kraken (https://www.kraken.com).
Addressing the raising importance of the widely spread virtual money, tax authorities began considering the acceptance of bitcoin as a payment method. In New Hampshire (the U.S.), a legislative bill that would require the state’s treasurer “to develop an implementation plan for the state to accept bitcoin as payment for taxes and fees” was introduced in the beginning of 2015. If accepted, the law should come in force in 2017 and would allow the taxpayers to pay their tax obligations with bitcoin. Similarly, in Utah (the U.S.), it was proposed to create a Council “on Payment Options for State Services to study whether and how the state could accept bitcoin as a valid form of payment”.
At present, the U.S. tax authority IRS does not accept bitcoin directly for paying tax obligations. However, there are methods to pay tax with bitcoins. For example, a company called Snapcard provides its clients with an opportunity to make digital transactions with bitcoins. One of the possible recipients of those transactions is indeed IRS. In other words, paying taxes with bitcoin is possible through a payment processor. The service is charged 0,5% of the transaction value.
In the U.S., as in the most European countries, bitcoin is treated as a type of virtual currency and is considered to be a capital asset. Thus, any profits received through bitcoin transactions are subject to a capital gain tax. Consequently, the losses made through bitcoins can be deducted from the tax bill.
The benefits from using bitcoin include fast and efficient payment worldwide, low fees for transactions, and low risks of fraud. However, there are some risks related to bitcoin operations. Firstly, due to the young economy and novel nature of bitcoin, the price of bitcoins unpredictably fluctuates. Thus, bitcoin network advices not to keep the savings in a form of bitcoin and to convert the payments received in bitcoin to the local currency. Secondly, bitcoin network has been a target for hacker attacks. For example, European bitcoin exchange Bitstamp was forced to suspend its activities in the beginning of 2015, after being hacked. The company experienced losses of 19.000 bitcoins that represent about $5 million. Similarly, Mt. Gox, the oldest venue for bitcoin operations collapsed in 2014, after hackers sent a bug into the company’s software. Mt.Gox lost about $450 million in funds, and the event became a warning signal for bitcoin investors.
Discussions about the future of bitcoin are taking place on various media channels. The bitcoin proponents claim bitcoin to be the future of a free currency independent from the federal government. Moreover, they emphasize the positive impact of bitcoin on the development of online payment technologies. The main argument against the future of Bitcoin is the deflationary character of this currency. The bitcoin opponents stress that, as the bitcoin economy is growing, bitcoin deflates in value. This factor incentivizes people to accumulate bitcoins rather than circulate them. Consequently, it limits the investments related to bitcoins.
To conclude, the technological uniqueness of bitcoin increases the uncertainty about its future. However, the attention that bitcoin receives from tax authorities proves its impact on the financial world.