Did Bitcoins just become less fungible?

Adam Levitin writes:

The IRS ruled that Bitcoin and other virtual currencies are property, not currency.  This means that they are subject to capital gains taxation.  And that means that Bitcoins are not fungible.  The price at which a particular Bitcoin was acquired (and this is traceable) determines the capital gains on that particular Bitcoin when spent.  If I spend Bitcoin A, which I bought at $10, but is now worth $400, I’ve got a very different tax treatment than if I spend Bitcoin B, which I bought at $390. (Poor Satoshi–he’s got a lot more capital gains than most…)  This means Bitcoins are not fungible, and that makes it unworkable as a currency.  If I have to figure out which particular Bitcoin in my wallet I want to spend and what the tax treatment will be, Bitcoin just doesn’t work as a commercial medium of exchange.  Bitcoin still works as a speculative medium, but Bitcoin’s claim has always been to being more than the latest iteration of the trading sardines–it aspired to be a commercial medium.  I don’t see that happening now.

The article is here.


The divine IRS gets to define whatever it wants to its own satisfaction and advantage. It makes sense in the land of the free and the home of the brave.

The alternative was for the IRS to define it as a currency which apparently would have led to even higher taxation (as income rather than capital gains).

How about an alternative where an unaccountable regulatory agency doesn't get to decide this either way?

You mean a world where instead of getting guidance on how to report and pay taxes on profits realized on bitcoin everyone just waits for the IRS to file charges against someone and see what a tax court rules?

That'd be one option, but I'd prefer a world without a backwards and counterproductive income tax system.

Sure Mike and I'd prefer a world where blowjobs were free - but that's not the world we live in.

Blow jobs are free. Just not compulsory.

The free blowjobs are the only legal ones. If you have to pay for your blowjobs, you're probably breaking the law.

Literal mr'er is literal.

False dichotomy. The alternative is that the IRS simply kept its hands off and let the market define what Bitcoin is. We don't need the IRS to tell us what Bitcoin is.

You don't do your own taxes, do you?

It's not a false dichotomy at all. The US has laws regarding how income generated by trading foreign currencies are taxed. If I buy Euros, they appreciate, and I convert them back to dollars. I have to pay taxes on the US dollars I made as a result of that speculation. This is taxed as normal income. So if BitCoins are a currency, then any gains from buying and selling them would be taxed as normal income. By defining it as property, it only faces the capital gains rate instead. (Money converted to make a personal transaction is not taxed.)

As far as the IRS is concerned there's no such thing as income generated by buying and selling things that isn't subject to tax laws. Whether or not such income is taxed isn't the question. The question is how to classify that income and what tax rate should apply, namely, do you tax it as normal income or as capital gains?

You'd have to be really naive to believe that you could make money buying and selling something and that the IRS wouldn't consider that income you made as, well, income.

The result of this ruling is that it hurts the ability to use BitCoins as a transactional currency (for if it were used for personal transactions and were defined as a currency, there'd be no tax), but it helps speculators since any gains made from buying and selling the currency will now be taxed at the lower capital gains rate instead of as normal income.

In short, it's good news for speculators, but bad for those who envision it as a medium of exchange.

How can something that has no physical presence be considered property? A bitcoin is an electronic data entry, that's the sum total of its existence. It has no value except as currency. If the possessor of the bitcoin uses it to obtain actual property, that doesn't necessarily reflect any dollar value of the property. Unless, of course, the IRS gives an arbitrary value to that property.

Intellectual property exists. Patents exist.

When you buy stock in a company, you're not buying anything physical.

The IRS doesn't care about the physical nature of things. They just care what else changes hands when people buy and sell them.

So your saying shares of Facebook, which have no physical property, isn't property? And IRS of capital gains from Facebook shares are arbitrary valuation? Come on, please troll better.

Can't you get a piece of paper that represents that stock? That'd be a cripplingly important piece of paper! An entire industry would exist to make sure people had the correct piece of paper at the correct time. What a waste of time and money to make sure people had money.

"When you buy stock in a company, you’re not buying anything physical."

Really? If someone buys 100% of the common stock of the Reading Railroad doesn't he own a bunch of engines and cars and real estate? But what's that got to do with bitcoin?

How does "the market" define what something is for taxation purposes?

Yes, the market should define tax law.

I don't think the math or logic works on that Joe.

Which classification do bitcoin users prefer for your answer.

Its a government turf grab is all. It is a feature of government, not of bitcoin.

The same problem would exist if it were deemed currency. Currency must be tracked lot by lot, a purchase is a sale, etc. Identical problems.

I think 1001 one times before this ruling, I heard people say "I own bitcoin."

That they now express dismay that the IRS also thinks they "own" bitcoin is a real head-scratcher.

Does this mean that any merchant that accepts them for purchases needs to maintain a ledger of each inbound and outbound use of these things? Will they have think in terms of tax lots for long and short term capital gains?

Yes, they would have to do the exact same thing if they were a US company accepting euros for payment as well.

The point of this post (hint: look at the headline) is that this ruling renders bitcoins not fungible, i.e. different bitcoins (actually outputs of transactions) have different real values because American tax authorities will attempt to tax each output at a different rate depending on the time of day when transaction occured. This is not an issue with Euros.

Do you believe that shares of stock are non-fungible as well? The tax treatment is essentially the same as trading stock which also varies in price during the day. This doesn't create a huge burden or make stock non-fungible. You'll just have to keep a list of transactions and have your accounting software calculate your net gains at the end of the year.

Ok, I wasn't clear. I was responding to the original post and therefore taking the claim there as a given. If the existing means of accounting for these mean that such entities are still fungible because then thats all right (though I still don't understand how it works either for bitcoins or shares in a company).

I'd note that in the eyes of the IRS there is still some distinction between bitcoins/shares and other currencies. That being the point of this ruling. You are saying it is a distinction that does not affect fungibility.

That is an issue with Euros. People just don't comply with the law and don't understand it. If you pay with euros, whether here or on vacation, it's a taxable disposition of euros.

(Commenter below correctly reminds me of the exception for small personal transactions. Thx)

Comparing to things like mutual funds with DRIP, you don't have to match up every single input to every single output. Instead you can do averages. But you must be consistent in whichever method you choose.

"If I have to figure out which particular Bitcoin in my wallet I want to spend and what the tax treatment will be, Bitcoin just doesn’t work as a commercial medium of exchange."

This claim needs more explanation. Since there are perfect digital records, and every transaction is already mediated by sophisticated software, your 'smart wallet' likely just picks the best treatment (FIFO, LIFO, lots) for you.

Yes, any spending/receiving that changes your net Bitcoin holdings creates some capital-gains impact, but you'll press a button at tax time and the computer will print it out for you, no mental effort required.

You mean your smart wallet games out the tax implications of each bitcoin in your wallet? Not a problem at all.

Who can innovate faster, the IRS or the crypto industry/community?


The IRS isn't trying and shouldn't be trying to "innovate." It's trying to create a set of rules that everyone understands and follows.

The IRS did try to innovate with simple, free, automatic tax returns that would make filing your taxes take only a few minutes for most people. Well, a bunch of European countries already do it, so it's not ground-breaking on the part of the IRS, but still.

Of course, Intuit, the makers of TurboTax, lobbied hard to make sure that wouldn't happen.


I think most of the Bitcoin community doesn't understand basic accounting rules. Or they think that accounting rules are for pussies or something.

I suspect the IRS will change its position when rubber hits the road. It's oversimplifying to say "a bitcoin in your wallet" has a given value. They mean an output of a given bitcoin transaction. But those transactions have inputs. So to actually calculate a capitial gain in $US the IRS would have to trace back each output through the whole blockchain until ... something.

In principle this is possible for a given definition of "something", since the blockchain is a public record. But I doubt they (or anyone) has the computational chops to apply any hard-to-game rule here. Then they have to convice courts that those computations are correct; they could possibly do that, but it would be safer to just give up and tax bitcoins as currency.

Two things:

a) Bitcoins are global. This only affects Americans.

b) According to an accountant on the bitcoin sub-reddit the IRS allows you to calculate things using the FIFO method but the coins themselves are fungible (of course they are).

c) Satoshi may not be an American.

Actually, this seems to be a favorable ruling for taxation of Bitcoin. If you sell a fungible asset, you have to take a proportional capital gain regardless of the price paid for any individual purchase (as for example with shares in a mutual fund). By this ruling, one can sell the bitcoins that would incur the least capital gains first (ought to be easy to automate) and thereby minimize one's taxes.

I think you need to look into how tax lots work for stock ownership. Mutual fund shares are ownership shares of an investment company.

Since this is not enforceable, then it's practically meaningless. I don't see the majority of Bitcoin users even bothering to lick the IRS's boots.

And it's not a ruling. Courts make rulings.

I guess you just gotta hope the IRS doesn't ever wonder where all that money came from when you sell your BitCoins. If you suddenly have many more US dollars and don't pay taxes on it and the IRS finds out, there are definitely tax evasion laws on the books they can use to enforce this rule. Sure, one can simply not tell the IRS about money made from BitCoin trading or BitCoin mining, just like one can not tell the IRS about any "under the table" payments, but that doesn't make it legal nor unenforceable (if caught).


Agencies make rulings all the time. The FTC, IRS, FCC, and just about any agencies that has the quasi-legislative authority to "interpret" laws makes rulings on things when the specifics have been delegated by congress yo the agency.

Second, the LAW is binding and if you don't report transactions over a certain level you are in violation of law. If you pay a merchant they are required to report payment if valued over $600 whether in bitcoins, gold, or a fine bottle of wine.

This is a notice of how the IRS is likely to eventually determine how bitcoins are treated and is instructional to taxpayers in what they are expected to fill out in their form.

If you are a single individual, making very little money out of the bitcoin trading, maybe. The minute you have significant amounts of money coming in and out of bank accounts, you are open to being detected automatically, or by a random audit. The IRS handles mistakes all the time, with relatively little fuss. Major tax evasion, not so much.

The IRS ruling is not legally binding - it does not have the force of statute law and it is unlikely any bitcoin owners will subscribe to it.

That's an interesting viewpoint and I wish you luck in tax court.

You get tax advice from Wesley Snipes?

Your ideas are intriguing to me and I would like to subscribe to your newsletter.

Your newsletter that you ran off on the mimeograph machine in your mom's basement about the Sixteenth Amendment don't reals, too.

You might want to spend a few minutes to look up Chevron Deference.

Firstly, the level of deference for IRS rulings is a somewhat open question that has in the past sometimes given Skidmore deference as well. The Supreme Court has yet to decide the level of deference (although I didnt read the ruling this week that may have addressed it).

Secondly, this is a notice which is a procedural rule that is not necessarily binding. The notice is a preliminary informational document that suggest a ruling is in the making but has yet to be promulgated. If you for some reason choose to treat bitcoins as a currency it would be litigated and not given Chevron deference per set since it is considered a procedural rule in how taxpayers should fill out their tax forms.

If you were to violate the notice you would be able to argue that your interpretation is reasonable and thus not be subject to penalty.

Thank you.

My apologies to the OP. It appeared at first to me that he was making a broad statement about IRS rules, but upon re-reading he may have taken the same tack as you.

Yes, if this is an informal document, then Skidmore Deference applies. The article began, "the IRS ruled" and I assumed they had gone through the APA rulemaking process.

Under either Skidmore or Chevron, the courts will still defer to the IRS. The two cases merely lay out different standards of proof for the plaintiffs upon which to challenge the ruling. My unspoken point remains: "Bitcoin is property" is the law of the land unless and until someone with standing challenges that ruling in court.

However, at least a few Supreme Court justices consider Skidmore superceded by Chevron, and any challenge to the IRS will likely settle that question.

Effectiveness of the ruling is another matter entirely.

Virtually everyone in the tax world knew from the outset that this is how bitcoin is to be treated. Deference aside, it will be upheld. The alternative is that BTC is currency and taxable in the same way but at top marginal rates.

This analysis seems rather flawed.

Just because one can track the addresses through which a bitcoin (fraction) has passed does not mean one can determine the basis for that property. The basis certainly does not change for any bitcoin sent to oneself!
Gold bars are often serialized and could also in theory be traced. Does this change anyone's actual behavior? I think the above commenters are correct in asserting that wallets apply a LIFO rule (or similar) as appropriate to the taxpayer, and the wallet software tracks the information. Also, as a practical matter, for small transactions and small aggregate volume, no reports will be filed, and the tax authority will not investigate just as is true for inconsequential exchanges of other property (yard sale anyone?)

Gold bars are probably a good example. You can buy them retail, put them in our safe, and then go sell them periodically. When does the IRS care? With limited means they probably follow the biggest fish rule. If $100,000 in coins (gold or bit) are cashed out that day, it might trigger a tax inquiry. A $1,000 sale, not so much.

Most people didn't need this ruling or this article to tell them that Bitcoins aren't actually a currency....

Whether they're a currency or not is for the market to decide. They may not be currency yet (the most accepted form of money), but they are definitely money. The government has only a slim amount of control over what society determines to be money.

But money is also property. Which makes this "guidance" from the IRS all that more contradictory.

The market has already decided that bitcoins are a scam. There's a couple slow-learners clinging to it for philosophical reasons, but hey, that's their problem.

Yes, that's right, the market that exists in your head that is.

Meanwhile the smartest VC is putting millions in bitcoin startups, somehow they just don't seem to be persuaded by you.

Somehow that doesn't persuade me that bitcoin is not a scam.

I am sure Bernie Madoff would be jumping is as well...

I'm confused.

How does Currency tax work? If I bought a bunch of Pesos and then Pesos strengthened and I traded them back for dollars how would that gain be taxed? Wouldn't it be taxed? If I continued to buy Pesos as they strengthened and then sold at the top how would I figure my tax given I bought each Peso at a different dollar price?

Or does the reference to currency v. taxation just mean I don't have to pay an additional tax on my dollar income if there was deflation after I earned it?

If you do it from a money stall at the airport, you're fine. But if you do it on line trading currency funds, there are tax implications.

if you have one bitcoin, i am sure there are no tax implications either. I mean everything at scales where there are tax implications.

Currency is taxed just like stocks and bonds, except you're taxed at the top marginal rate instead of the cap gains rate. So when you sell or spend those pesos, it's a taxable event.

it's slightly more complicated re when it's taxed at cap gain rates versus ordinary rates, but that's the gist.

bitcoin a great buying opportunity at these levels. .


These bitcoins are FUCKING fungible!

Oh baby show me your blockchain

Argument #848117792103012131321 for abolishing income taxes.

Technically, it isn't an income tax.

Technically, it is.

How many divisions does Bitcoin have? Until the answer is some number larger than zero, Bitcoin is not money.

Each Bitcoin can be split into 100,000,000 pieces. It's much more divisible than the US dollar. The smallest unit of account in Bitcoin is called a Satoshi and is currently worth about $0.00000516.

Divisions: http://en.wikipedia.org/wiki/Division_%28military%29

But thanks for the chuckle.

Your original comment makes much more sense now :)

There are countries with money and without any division.
And the Pope has the former but not the latter, my dear Joe Steel.

I think that the IRS interpretation is correct. However, with the untraceable nature of the bitcoin exchange, it is going to be darn tough to prove (or not prove) that there was any gain.

However, if the bitcoin is a foreign currency, then if it became more currency like, most people would not hold much of a wallet full of bitcoin. Instead, they would buy as much bitcoin as the need to make a transaction and then buy something with it. There would be very little time to realize a gain or loss in the exchange value of the bitcoin. Only the bitcoin bankers who facilitate the exchange would have to deal with the IRS.

Taxpayers have the burden of establishing basis. If you convert bitcoins for $10,000, the position of the IRS is that, unless and until you show how much you paid for the bitcoins, you have $10,000 of gain.

... I think his point is that the IRS will never know he got the $10,000 in the first place. For all purposes, Bitcoin is like under the table cash earnings. No one is going to report it.

This means absolutely NOTHING. The last days of the State are upon us, Bitcoin is going to overcome this and lead to the destruction of government power once and for all.

The price at which a particular Bitcoin was acquired (and this is traceable) determines the capital gains on that particular Bitcoin when spent. If I spend Bitcoin A, which I bought at $10, but is now worth $400, I’ve got a very different tax treatment than if I spend Bitcoin B, which I bought at $390.

It seems to me this isn't entirely true. You seem to be assuming people are using specific identification as the cost basis, rather than FIFO cost basis, which is far more common anyways.

So which capital gains rate I wonder...that of collectibles at 28% like Beany Babies?

When is the gain recorded? When I convert them to dollars or when I transact in them in a bitcoin denominated trasaction? I"m not sure the second one counts, though I'm not expert.

Like with Euros or shares of MSFT, when you sell them for something else.

First Germany and Sweden, now the US.

."And that means that Bitcoins are not fungible. The price at which a particular Bitcoin was acquired (and this is traceable) determines the capital gains on that particular Bitcoin when spent. If I spend Bitcoin A, which I bought at $10, but is now worth $400, I’ve got a very different tax treatment than if I spend Bitcoin B, which I bought at $390."

Poor Adam doesn't seem to know much about the Tax Code, but that doesn't stop him from writing nonsense about something he doesn't seem to have a clue about.

If Bitcoin were a "currency" the transaction where the coin was purchased at $10 and sold at $400 would result in an *ordinary* $390 (taxable) gain unless it was a forward transaction. Does that main a transaction in foreign currency more "fungible"? Capital gains treatment is much better for Bitcoin if the gain is long term (holding period greater than 1 year). Small gains in currency of less than $200 are not reportable whereas gains in capital assets are; but, is anyone gain to voluntarily report a small gain (less than $200 in Bitcoin)?

If this is "bad" for Bitcoin, the IRS is going to have to figure out some means of making these small transactions reportable and the tax treatment enforceable.

See section 988 of the IRC Adam.

"main" should be "make" and "gain" should be "going".

The other day i saw a pickup truck of a chicken seller with "I accept bitcoins" written in soap.

To me the more interesting part is how mining is treated as wages. If you mine a virtual currency you are considered a independent contractor and are requires to deduct payroll taxes from your mined coins.

Although I guess you could deduct hardware costs as a business expense at least.

The Bitcoiners made many comparisons to "gold". Even the logo is a gold coin. It's "mined" and its value isn't declared by fiat.

So when the Government says it should be taxed like "gold" why are they complaining?

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