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Bitcoin: the Price of Legitimization

  • Aug 20, 2013 | Gail Cole

 Bitcoin: can it be taxed?

Bitcoin, an "experimental, decentralized digital currency," grew out of the concept that "money is any object… accepted as payment for goods and services and repayment of debts…." It "lives as a code inside a computer… but works in many ways like cold hard cash." No central authority, such as a bank, is involved in bitcoin transactions. Instead, transactions "are managed collectively by the network." It's virtually anonymous, too.

"Bitcoin payments can usually be made more quickly and cheaply but they lack safety nets that come with using a more established system." Digital currency has been called "incredibly solid and incredibly clever from a technical standpoint." It's also been called "crazy stupid" because of its fragile security and economic model (NY Times).

Clever or stupid, Bitcoin now has an estimated global worth of more than a billion dollars. And this week, it gained official recognition from the government of Germany. From now on, "if companies want to use Bitcoins for commercial transactions (in Germany), they need the permission of the Federal Financial Supervisory Authority (BaFin)."

Official recognition comes with a price. Thus far, bitcoin transactions have not been subject to sales tax or its more widely used equivalent, the value added tax (VAT). According to Germany's federal ministry of finance, that should change. The government has reportedly said it would not provide "a tax exemption on commercial activities that use Bitcoins." Bitcoin users should pay capital gains tax, and they "should now pay sales tax (VAT) as well" (TechCrunch).

Perhaps they should. Yet as the Huffington Post points out, "Bitcoin is virtually impossible to tax." This is because it is anonymous and unregulated:

"There is no way for governments to know who owns what, who is paying whom, what is being sold, who is buying what, and how much income a Bitcoin owner has."

Governments are becoming increasingly interested in the Bitcoin industry. Germany's recent decision "legitimizes Bitcoin" and seeks to regulate it--can there be taxation without some sort of regulation? And in New York, "state financial regulators have subpoenaed Bitcoin businesses and raised the possibility of 'new regulatory guidelines.'"

It has been said that "Bitcoin is fundamentally based on mistrust," that it "was designed to evade governments and central banks." Whether or not governments will succeed in subject Bitcoin transactions to tax remains to be seen.

How does your company handle sales tax?

photo credit: zcopley via photopin cc

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.