Most Bitcoin investors understand the concept of capital gains taxes. If you purchase an asset like a stock or bond and it appreciates, you pay tax on the appreciation. Likewise, if it falls, you deduct the losses from your income. That is simple and logical enough.
If the IRS left Bitcoin taxation at that, it would be easy for Bitcoin investors to determine if they owed any tax or had any losses. They could simply review their trading accounts for the tax year. Is the cost-basis (the total paid) higher or lower than what they have at year’s end? By how much? Now they know what to include as their profit or loss.
In another example of bureaucracy run amok, the IRS has decided to make the taxation question for cryptocurrency a needless muddle. They have already published voluminous rules of confusion. The problem is that the IRS decided to treat Bitcoin like property. Under this guidance, Bitcoin users who use the cryptocurrency to buy physical products, rather than trading it for dollars or other currencies as an investment, face a arduous and probably impossible task of tracking every single Bitcoin purchase as an investment with a cost basis.
As we all know, Bitcoin, unlike fiat currencies, fluctuates quickly in value. One Bitcoin might be work $10,000 one day and $9,000 the next. The following day it might bounce to $11,000 before plummeting in $9,500 in two hours. Now imagine if during this time you were on the Internet buying Bitcoin gift cards and using them to purchase various items. You might purchase several gift cards worth hundreds of dollars and buy ten items, then leave some value on the gift cards.
Because the IRS considers Bitcoin property, you need to track the cost basis of the radically volatile fractions of Bitcoin you used to make these purchases. This is enough to give the most mathematically gifted a headache. The cost basis for Bitcoin shifts by the minute. You may have one cost basis for a purchase of socks with a fraction of a Bitcoin and a different cost basis for a different fraction of a Bitcoin for a shirt you purchased 30-minutes later.
Can anyone actually comply with such a rule?
This is unlikely, and if you try, you will probably get flagged for an audit. Bitcoin users are already very low in compliance with the IRS, and after the IRS released this guidance, many shifted assets to other cryptocurrencies they are certain the IRS will never track. With such onerous rules, the IRS can expect very little compliance with reporting cryptocurrency trading, and consequently, it has destroyed its chances to collect that revenue.