Bitcoins have suddenly been the subject of flurry of articles in places like the New Scientist (probably because a Swedish IT entrepreneur, Rickard Falkvinge, has announced that he’s putting his money into Bitcoins), with some more hysterical commentators declaring that Bitcoins are a danger to governments because they “can’t be taxed”. I thought I’d add this article to the flurry, to examine that hypothesis.
In summary, governments don’t generally care what format your wealth change is in; they will want the tax paid in their local currency, but are quite happy to let you earn it in anything you like – including Linden dollars, for example (to take a mild blast from the past). You need to declare it on your tax return (translated to local currency) when it increases your wealth; whether or not the Government can easily find out about it is irrelevant to a taxpayer’s obligations under law. To be pedantic (no doubt a first for a tax lawyer), the hysteria also misses the point that currency itself is not generally taxed (except in the case of collectible coins, for example) – tax is based on changes in wealth, which are usually measurable in currency of one format or another.
The main tax question is: when does a virtual currency increase your wealth for tax purposes?