The thing about law that often confuses geeks is that they think the law works like a rigid algorithm with precisely defined inputs, or that it must limit itself to objective inputs.
They conclude that if they using something other than money as money, the law won't have a say because they are operating outside the precisely defined input.
Not so. The law can handle fuzzy situations, and since it can deal with subjective things such as what was in the minds of the people doing things, it will have no trouble incorporating Bitcoin transactions into the tax structure.
As a first pass, it could treat them as barter transactions, which are well covered by the tax system. In fact, there is a large body of law dealing with people trading non-currency items. It is quite interesting. Suppose I buy an X and you buy a Y. Later, we swap them. If they are the same kind of thing (we are trading my Picasso for your Rembrandt) there are no tax consequences. If I later sell the Rembrandt, it is taxed as if I had bought the Rembrandt for the price I paid for the Picasso, and so my tax is based on the profit based on that. Same for you.
If, on the other hand, X an Y are not the same kind of thing, then it is treated as if we did a pair of sales. For example, if I trade my Picasso for your race horse, the law would treat it as if I had sold my Picasso to you and used the proceeds to buy your horse, and you sold your horse to me, using the proceeds to buy the Picasso. I have to report income equal to the difference in value between the horse and what I paid for the Picasso, and similarly for you.
Subsequently when I sell the race horse, it is treated as if I had bought it for in the imaginary double sale, rather than whatever I paid for my Picasso. This price that you track in order to determine what the base price is to use when determining profit or loss on a real sale is called your "basis" in the item. In a like kind exchange, your basis in the received item is the same as your basis in the item you gave away. In an exchange that is not like kind, you get a new basis that is what you paid for the item in the imaginary double sale transaction.
There's case law and regulations dealing with all kinds of variations on this theme. For instance, if I trade my male horse for your female horse, is that a like kind exchange or not?
I don't think the law will have any trouble at all dealing with taxation and Bitcoin.
They conclude that if they using something other than money as money, the law won't have a say because they are operating outside the precisely defined input.
Not so. The law can handle fuzzy situations, and since it can deal with subjective things such as what was in the minds of the people doing things, it will have no trouble incorporating Bitcoin transactions into the tax structure.
As a first pass, it could treat them as barter transactions, which are well covered by the tax system. In fact, there is a large body of law dealing with people trading non-currency items. It is quite interesting. Suppose I buy an X and you buy a Y. Later, we swap them. If they are the same kind of thing (we are trading my Picasso for your Rembrandt) there are no tax consequences. If I later sell the Rembrandt, it is taxed as if I had bought the Rembrandt for the price I paid for the Picasso, and so my tax is based on the profit based on that. Same for you.
If, on the other hand, X an Y are not the same kind of thing, then it is treated as if we did a pair of sales. For example, if I trade my Picasso for your race horse, the law would treat it as if I had sold my Picasso to you and used the proceeds to buy your horse, and you sold your horse to me, using the proceeds to buy the Picasso. I have to report income equal to the difference in value between the horse and what I paid for the Picasso, and similarly for you.
Subsequently when I sell the race horse, it is treated as if I had bought it for in the imaginary double sale, rather than whatever I paid for my Picasso. This price that you track in order to determine what the base price is to use when determining profit or loss on a real sale is called your "basis" in the item. In a like kind exchange, your basis in the received item is the same as your basis in the item you gave away. In an exchange that is not like kind, you get a new basis that is what you paid for the item in the imaginary double sale transaction.
There's case law and regulations dealing with all kinds of variations on this theme. For instance, if I trade my male horse for your female horse, is that a like kind exchange or not?
I don't think the law will have any trouble at all dealing with taxation and Bitcoin.