This week in bitcoin: IRS declares bitcoin is property, price falls below $500

In this week’s bitcoin review, we recap the first formal U.S. government stance on the cryptocurrency and the market falling more than $100.

So, it’s property, not currency.

Everyone knew the taxman was going to come after his share of the riches soon enough. The question that lingered though was how: was bitcoin to be taxed like a currency or like property? Jeff Roberts explained in an article earlier this week the options that the IRS had to consider and how some of bitcoin’s newly minted millionaires should report their income.

The next day, the IRS declared it to be property and subject to capital gains or losses.

The decisions does mean a headache-inducing amount of paperwork and keeping track of things. For example, if someone buys a TV or cup of coffee with bitcoin, they have to calculate the change in value from the date they acquired the bitcoin to the date it was spent and then report that change as capital loss or gains. And the new rules don’t apply just to spending the cryptocurrency… er, cryptoproperty. For example, bitcoin miners must include the market value upon receipt of the bitcoin as taxable, gross income. Thankfully the IRS did issue a handy FAQ document for those who need to dig into the tax laws a little more.

While some are mourning the end of bitcoin’s status as a fringe product, the fact that the U.S. government is acknowledging the cryptocurrency means that it is inching towards the mainstream. Going forward, if bitcoin wallet startups want to succeed they will want to  incorporate the new tax laws automatically into their product, issuing 1099’s or automatically calculating capital gains to make the headache disappear. And as venture capitalist Chamath Palihapitiya said at the CoinSummit this week, “we should celebrate the fact that the U.S. government acknowledged what you care about.”

The market this week

Bitcoin took a bad tumble at the end of this week, falling 17.43 percent in one day to close at $478.16. Coindesk reported that the drop could be blamed on a rumor about China penalizing any bank that deals with bitcoin transactions. It had already bounced back to $502 by 10:10am PT, but it’s another reminder of how volatile the bitcoin market remains.

Bitocin chart 3-27-14

For background on why we’re using Coindesk’s Bitcoin Price Index, see note at bottom of the post. 

In other news we covered this week:

  • Circle, which is vying with Coinbase to be a major early player in the bitcoin space, announced a $17 million funding round and released its first product to select users. The odd part, however, is that they’re not revealing any details about that product.
  • Bitcoin exchange Vircurex froze its withdrawals. As exchange collapses go, this one is notable for its highly optimistic approach to overcoming insolvency.
  • Marc Andreessen spoke at this year’s CoinSummit about where bitcoin needs to go in the future — and where he’s looking to invest.

Here are some of the best reads from around the web this week:

  • Andy Greenberg of Forbes tried to track down bitcoin’s creator and instead found his neighbor: a paralyzed crypto genius who was the first person to be given coins from Nakamoto.
  • Bob McMillan looks for the soul of bitcoin in this piece from WIRED magazine.
  • If that’s too much reading, WIRED shows how bitcoin became a vicious trading war, featuring characters like the bitcoin baron and the dueling bot — all in chart form.
  • This man ate a hat — yes, the kind you wear on your head — after losing a bitcoin bet.
  • Freakonomics Radio did a segment on bitcoin that’s worth a quick listen. Their argument: “Thinking of Bitcoin as just a digital currency is like thinking about the Internet as just e-mail. Its potential is much more exciting than that.”

Bitcoin in 2014

We’ve hit the lowest price so far in 2014; a bitcoin is now worth half its value compared to three months ago.

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Bitcoin’s weekly closing price since 2013

We haven’t seen the price this low since late 2013. Let’s hope the market doesn’t turn out to be a bell curve.
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A note on our data: We use Coindesk’s Bitcoin Price Index to obtain both a historical and current reflection of the Bitcoin market. The BPI is an average of the two Bitcoin exchanges which meet their criteria, Bitstamp and BTC-e. To see the criteria for inclusion or for price updates by the minute, visit Coindesk. Since the market never closes, the “closing price” as noted in the graphics is based on end of day Greenwich Mean Time (GMT) or British Summer Time (BST). 

Featured image from Thinkstock/Nevarpp