Law and Order: What Should Law-Abiding Bitcoin Users Know?

According to the recent tax treatment guidance issued by the Internal Revenue Service (IRS) Bitcoin has to be considered as property. Those who hold or use Bitcoin are attempting to read between the lines to understand the principles of taxation and the obligations of every entrepreneur, miner on investor operating in the online financial market.

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Law and Order: What Should Law-Abiding Bitcoin Users Know?
According to the recent tax treatment guidance issued by the Internal Revenue Service (IRS) Bitcoin has to be considered as property. Those who hold or use Bitcoin are attempting to read between the lines to understand the principles of taxation and the obligations of every entrepreneur, miner on investor operating in the online financial market. 
The journalist behind the name, Justin, has provided SilentVault with valuable analysis showing that there are no real dangers for law-abiding citizens. 
 
IRS Drops the Hammer on Virtual Currencies 
 
The IRS has published a Q&A guidance to clarify the treatment of Bitcoin. The exhaustive response from the society has included everything – scares, doubts and many more questions. 
 
Bitcoin opponents consider the new regulations as one more hammer blow of fate which will ultimately fell the hero. Supporters meanwhile are trying to understand the necessary alterations to their current bookkeeping routine. 
 
Justin poses the main question. According to his conclusions no one can assess the impact of a tax agency's guidance without first asking themselves how it is that tax liability arises in the first place. (Or at any rate, no one should.) What makes the use of virtual currencies subject to the jurisdiction of the IRS to begin with?
 
 
Excising Excise 
 
The author of the research points out a phrase often used in the Q&A: between Bitcoin economy and “trade or business” the equals sign is put. The tax code defines the term as following: 
 
“26 USC § 7701: (26) Trade or business: The term “trade or business” includes the performance of the functions of a public office.” 
 
To paraphrase, it is obvious that “trade and business” exists only in collaboration with public office. So what has all this got to do with Bitcoin? The answer is absolutely nothing, unless the miner, trader, exchanger, or investor has some connection with Washington. 
 
For example, any firm which holds a federal MSB (money service business) license from the Treasury Dept. would definitely be “engaged in trade or business”. Such companies maintain a customer identity database and make various reports (as required by their license); they are assisting the Treasury in enforcing certain regulations concerning money laundering, terrorist financing, and the like. 
 
Other examples of business activities which would likewise fall under the purview of the federal income excise include:
 
  • Federally chartered "National Association" (N.A.) banks or federal credit unions, their employees' wages, shareholder dividends, bondholder interest, interest paid to depositors, etc.; 
  • US government civilian and military employees (obviously); 
  • Television and radio stations with FCC broadcast licenses; 
  • Airlines and pilots with FAA licenses; 
  • Medical clinics which serve Medicare and Medicaid patients (to the extent that they do so); 
  • Railroads licensed for interstate commerce;
  • Mining and oil companies working claims on BLM land;
  • Interstate trucking companies with US DOT licenses;
  • Non-citizen green card and H1-B work visa holders legally working in the US (at anything); 
  • US citizens working abroad and taking advantage of a US tax treaty;
  • Private sector companies working on federal government contracts;
  • Companies producing goods protected by US patent filings (govt granted monopolies); 
  • Stockbrokers and others holding SEC licenses;
  • Perhaps: profits derived from trading on US-regulated exchanges (NYSE, NASDAQ, COMEX, etc.).  
As there is a federal nexus, because money is being made by virtue of federal government employment, permission, licensing, or patronage, then it is a privilege, not a right, and as such produces income subject to excise. 
 
The IRS is by no means claiming that all Bitcoin users and owners everywhere owe them taxes on their property; that would be absurd. It is merely asserting that those using Bitcoin in the course of making money from their federal privileges will owe excise tax on their income realized in Bitcoin. Naturally. But if you exercise no such privilege to make money, then you have no taxable federal income — neither in Bitcoin nor in dollars! 
 
Such confusion in official guidance and other documentation makes many believe that they are obliged to report their activity and pay the aforementioned taxes. Those who wilfully volunteer information are treated as those who are obliged to. It means that they can be audited, fined for mistakes, and prosecuted criminally for perjury if they knowingly make false statements on a return. 
 
Which for Bitcoin Means What? 
 
There are, of course, some Bitcoin companies which possess the mentioned MSB license, but their customers are not ruled out of their obligations. FinCEN has set up a limit – a sum the enterprise deals with. Beneath it a MSB license is not required, while above means it becomes a must. 
 
Justin understands that the greater part of the Bitcoin user community will never understand these issues, or would never dare to act on their understanding even if they had such, and therefore will be shepherded neatly back into the pen with the other tax cattle. He can envisage clear methods of how to become even more hidden from the authorities while performing operations with virtual currencies. 
 
Indirection Avoids False Indirect Tax Reporting 
 
One of the methods pointed out is the exchange of BTC towards SBC vouchers. The items are not tracked as Bitcoin transactions with a block chain, which means no trace of activity is left. 
 
Two users willing to buy and sell Bitcoin for fiat dollars might obtain SBC vouchers and USV vouchers (issued outside the US) and exchange them while keeping the identities private. The basic principles of these two financial documents or virtual assets provide many interesting advantages. 
 
Justin carefully lists opportunities provided by the system, which include advantages for the single user and the system as a whole. The method might exclude “over-withdraw” or double-cashing as with Mt.Gox, and the trade is performed by escrow wallets in the cloud minimizing the impact of any operator and many more. 
 
The Coin Telegraph together with Justin advise everyone to study carefully the official documents, to obtain basic legal knowledge or a consultation, and not to panic over perceived threats. 
 
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