Bitcoin Faces Taxes, Regulation

German authorities are declaring Bitcoins to be "private money," and thus liable to tax, as the virtual currency faces increased scrutiny and regulation.

Minted Bitcoin

Bitcoins are facing an increasing amount of regulation, after its early days as a unique cryptocurrency and virtual currency.  (Source:  Zach Copley)

Bitcoin, which has gained a reputation as an unregulated currency that relies heavily on being an encrypted currency to maintain anonymity between those who trade with it, is now seeing the end of its Wild West days.  Last week, prosecutors in the state of New York began investigating Bitcoin firms over whether they follow the American financial regulatory guidelines.  Now, officials in Germany have declared that using Bitcoins will still make users liable for paying sales tax, as they are now "private money."

Bitcoins gained a huge pickup in popularity in recent years, due to the mostly-anonymous nature of the currency.  Created by an anonymous contributor going by the name "Satoshi Nakamoto," Bitcoins uses peer-to-peer software similar to that found in Napster and BitTorrent to manage transactions.  The currency is sent anonymously, with only an encrypted code from the user, making it difficult to track.  The uses of such anonymous transactions have had many great uses, from anonymous donations to people, to buying products and services in other countries without having to figure out exchange rates and taxes.

However, the problem with Bitcoins is that because of its anonymity, the potential for criminal use skyrockets.  With Bitcoins, one can launder their money pretty easily, or use it to buy such things as weapons and illicit drugs, or hold information ransom, as happened last year.  One could use it to evade taxes as well, a big deal to governments.  So now, authorities are beginning to clamp down on the situation.

While the American government initially posted a determination on Bitcoin use, which absolved the currency of certain laws but makes users liable to financial regulations, Germany's actions are a step further.  Before this, the German government announced in June that trading in Bitcoins would make users subject to a capital gains tax, a tax that takes a portion of a person's profits from trading.  However, people who held on to Bitcoins for more than a year, for the purpose of using it as a secondary currency for services rather than investment, would be exempt from the tax.

The Germans' new policy, spearheaded by Bundestag member Frank Schaeffler of the FDP, declares that Bitcoins are "private money," and as a product rather than currency, are thus subject to a tax on the currency itself in a common variation on a sales tax called a value-added tax (VAT).  How it is to be collected remains unclear, given that the relative anonymity of Bitcoins makes it hard to determine whether transactions were made in Germany or not.

While these policies are helping to make Bitcoins legitimate, and make it less likely to be subject to some ignorant witch-hunt, one cannot help but feel for those who use the currency for its original purpose:  To buy or sell in relative anonymity, free from prying eyes and snooping authorities.  Now, the currency, despite its virtual nature, will simply become another currency, and its usefulness will decline over time.

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