Forget the Gold Standard — What about Bitcoin?

“All money is a matter of belief.”
– Adam Smith

We have lived through the rise of the personal computer, e-mail, smart phones, tablets, Tesla’s, GoogleGlass, and the like. What’s next? How about a digital currency?

Odds are you’ve heard about it. It’s called Bitcoin.

For those of you who aren’t quite certain about what Bitcoin is, here is your overview. Bitcoin is not managed by any government or central authority. It relies on an Internet-based network. The creation of new Bitcoins is automated and given to “Bitcoin miners” who confirm Bitcoin creation as they add codes to a decentralized and archived log. They are paid to computer hobbyists who monitor the Bitcoin system to keep it running and prevent counterfeiting. Bitcoins can be transferred through a computer or smartphone locally or internationally without an intermediate financial institution.

The security comes from the encryption and registration of every Bitcoin issued. The encryption has the same effect as putting a combination lock on each coin that needs 100 numbers entered to unlock it. Every move a coin makes is recorded on a public log, each log being issued every 10 minutes.

The value of a Bitcoin depends on its exchange rate. The US dollar/Bitcoin exchange rate is currently very volatile and is increasing. The exchange rate is in flux. That means if you spend a Bitcoin for something, the exchange rate tomorrow might mean you paid a dollar for a pound of coffee or $100. The goal is for it to be a currency that no government can debase and no bank can control.

So, how is income involving Bitcoin taxed? It’s taxed the same way as income in Euros or Yen or any other currency is taxed. It is taxed the same was as bartering income is taxed. You keep records of its value when you get it, its value when you sell it and report the gain just as if it were reported to you with a 1099-B.

If you are paid in Bitcoin for work you do, report it as income.

If you sell goods for Bitcoin, the value of the Bitcoin at the time of sale minus the value of the goods you sold (i.e., the cost of material, labor, and other business costs directly related to that unit that was sold) is profit that you declare. The basic principal of income minus deductions yielding a taxable income, the tax on which may have credits available to reduce the tax still applies.

Just as in bartering, you may think that the system is ripe for tax evasion, but people who barter in business tend to be more compliant that people who do not. The key for compliance as in any finance or business venture is to keep accurate records and update them daily.

Will Bitcoin become the credit card of the future? It needs time to stabilize and acquire more users if it can. It will need the government to accept payment for “all debts public and private” in Bitcoin to truly succeed.

– Patti Spencer