Thursday, April 10, 2014

Bitcoin and the Dragon

Recently the Internal Revenue Service (IRS) ruled that digital currencies, Bitcoin in particular, are classified as property not currency.  Suddenly, the value dropped as people became fearful of the tax consequences.  Understandable.  The goverment acts in self-interest and that does not include yourself.  Basically, the banksters are afraid of a currency that will be limited in quantity as that will reveal the fraudulent nature of the fractional (read 'fiat') banking system that very effectively taxes the poor disproportionately higher by stealing their purchasing power over time. What to do.  Well, I have an idea.  'Property' covers a number of areas. Automobiles are 'property', right?  Yep, 'personal' property.  Wait, so GM sells 'personal' property?  No, GM sells a type of property called, 'inventory'.  Hmmmm.  So, maybe we, who use Bitcoin, should consider ourselves to be in business, buying and selling inventory (or creating it as in the case of the Bitcoin miners).  That would mean you have expenses to support that business of generating revenues from the buying and selling of Bitcoin.  An example would be you work for a couple of days for a friend in his business.  He is purchasing your labor with Bitcoin but you are purchasing Bitcoin with your labor, which is billable.  In order to keep track of the cost in dollars of Bitcoin, you have to 'purchase' it into inventory.  Then, you 'sell' your services (inventory) for whatever you think it's worth.  If the sales price is greater than the purchase price, you have a profit and if the sales price is less than the purchase price, you have a loss.  If you sell for the same as the purchase price, you are at breakeven  EXCEPT, remember, you are in business now.  You have other expenses.  One idea is secure storage costs for your inventory.  This is always an issue because inventory that just vanishes is a cost.  Because business involves relationships of trust at various levels, it would be a good idea to personally interview the people who will secure your inventory.  Of course, personal interviews involve travel to one degree or another.  Business travel is expensible, meaning it reduces taxable income.  Let's say you have to decide between Bitcoin exchanges and there are three that you think are reasonable candidates to guard your inventory.  Well is in Germany; is in the British Virgin Islands; is in China.  That involves extensive, expensive travel.  All written off against revenues of trading Bitcoin inventory.  And if your executive assistant happens to be your spouse, travel costs double.  Not to mention the office you have to maintain in your home for business.  Use your imagination.  It gets even better if you do this with an 'S' corporation because active losses pass through to you  and you can pay yourself a relatively small wage and the pass-through earnings are not considered 'earned' income and, hence, no self-employment tax is due.  Thanks to the IRS ruling, we're all in business now.


  1. I like your thought process but can this strategy be effectively implemented to where it is accepted by the IRS? I can remember years ago where tax theorists were looking at the oil depletion allowance as being analogous to the individual's energy and life. It was a good thought but went nowhere as far as killing the dragon. Best Regards, David Grogan

  2. Hi David. You have a good point because the IRS is often capricious. I think that, since they have already ruled that Bitcoin is property, not currency, making that property your inventory is something they can't rule against,or, if they do, they will lose mainly because inventory, by definition, is property. Who can know for sure?

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