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Are bitcoins taxless?

A recent posting on the turbo tax blog seems to give tax advice regarding bitcoins while trying to educate its readers on the the basic concepts of the digital currency.

Calling bitcoins “the taxless currency” and stating that “Bitcoins are produced without the involvement of governments or banks, thus avoiding taxes.”  turbo tax seems quite sure of themselves despite the fact many so-called bitcoin experts and the community at large cannot reach consensus on the taxable status of bitcoins or bitcoin transactions.

While the growing awareness for the fledgling currency is always a welcome sign, a conspicuous disregard for the basic facts at the turbotax blog should call into question their statements regarding the tax status of bitcoin.

There are several blatant errors contained within this infographic (click for full size):

1. “There are privacy and security issues that arise since bitcoins are shared online.”

While this statement may be factually correct it is misleading in that it implies that bitcoins are less secure or private than other means of online payment. A certain amount of security and privacy risk is involved in the sending of any information over a computer network, however bitcoins are currently the most secure and most private method of transacting payments online.

2. Transactions are difficult and based on scripts contained inside them; they are executed to access the “money”.

This statement is false. Transactions are easier to perform in bitcoin than in any other form of online payment. This concept of scripts contained inside bitcoins is just silly, and can only result from a very limited and very incorrect understanding of bitcoin.

3. Bitcoins are the currency for many criminals online.

Whenever this statement is made there should be a disclaimer attached denoting the fact that the US dollar in is the most widely used form of currency for illegal transactions on the planet (studies have shown that nearly every bill in circulation contains trace amounts of cocaine). The fact that criminals can use bitcoin, like any internet tool (email, websites, messageboards, usenet, irc) to facilitate their activities does in no way detract from its value or even remotely imply that it somehow supports criminal activity.

4. Bitcoin exchanges are somewhat like the practice of tipping; it uses the honor system.

No, bitcoin exchanges are not like the practice of tipping at all. Is the NYSE like the practice of tipping? In fact mtgox.com goes one better than any other financial exchange (other bitcoin exchanges most likely do as well).  According to their website, mtgox.com does not function as a counterparty or intermediary.

This means that when you trade bitcoins on mtgox you are actually exchanging bitcoins directly with other people, without a third-party intermediary. In contrast, virtually all modern stock exchanges function as (or force you to deal with)  intermediaries, counterparties, or market makers in some fashion.

Hopefully turbotax eventually gets their facts straight and can properly address the tax liability issue responsibly for their users. Until then it is advisable for anyone seeking answers to questions regarding taxation and bitcoin to consult with their accountant or attorney.

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Categories: bitcoin, news Tags: , ,
  1. drawoc
    July 21, 2011 at 8:26 pm

    I’d like to point out that bitcoin does in fact use scripts behind the scenes in transactions:
    http://en.bitcoin.it/wiki/Script

    The falsehood in the poster is that it suggests that the end user needs to worry about this at all.

    • RDM
      July 21, 2011 at 8:28 pm

      I suppose in the way that any online transfer of data needs to use some form of scripting or programming. I got the implication from the blog post that these scripts were a sercurity vulnerability on the part of the bitcoin client user. This as you point out is baseless. Thanks for the added clarity though!

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