Up until now, I have ignored all the commotion regarding something called “Bitcoin.” I guess I am a little old-fashioned in that I still use those green slips of paper with pictures of dead presidents to make purchases, although I will admit to using my debit card at the grocery store. After all, who carries enough cash in their pocket to buy a week or two weeks worth of groceries? In studying up for this article, I discovered that Bitcoin is not the only digital money. There are more than 300 digital currencies. Bitcoin, for whatever reason, appears to be the one most talked about.
It is a difficult subject to explain. One article on the subject commented that it is like “trying to explain the Internet to someone who lived in the ‘70’s. They might think they get it, but without actually experiencing it, they’d never truly understand.”
As I understand it, Bitcoins are stored in a computer or smart phone. This is referred to as a “Bitcoin wallet.” There is a “shared public ledger” on which the Bitcoin network relies. A transaction is a transfer of value between Bitcoin wallets. Another article I read said that Bitcoins don’t actually exist anywhere; not even on a hard drive. And so I am already confused. It’s not like you can look at a Bitcoin wallet the same way you can look at dollars held in a bank account. There are only records of transactions between different Bitcoin addresses, with balances that increase or decrease. If party A wants to send party B six Bitcoins, then the computer will look at all the transactions involving Bitcoins that Party A has received and combine enough of those individual transactions to add up to six Bitcoins. For example, if party A had received 3 Bitcoins from Party C, 2 Bitcoins from Party D, and 1 Bitcoin from Party E, then her Bitcoin wallet will try to use all these transaction records to come up with the 6 Bitcoins that Party A wants to send. Don’t ask how change is handled.
I was surprised to learn how many businesses are already accepting Bitcoins. Some of these include: Dell, Overstock, Dish Network, Tiger Direct and even Reeds Jewelers, which is based in Wilmington.
Bitcoins can be purchased as an investment, which theoretically would only grow in value since there is presumably a finite number of Bitcoins. This differs from the dollar, which can change in value simply by the Treasury printing more money. If there is supposedly a finite number of Bitcoins, why can’t the computer simply create more of these electronic things? In fact, the supply of Bitcoins does grow through a computerized system called “mining.” But trying to explain that would take at least another whole article. Just trust me when I say it’s complex and probably more than you want to know.
Bitcoins have now attracted the interest of law enforcement agencies, tax authorities, and legal regulators. They are all trying to understand how all this digital currency fits in with the existing frameworks. Law enforcement agencies are concerned that offshore services could be a place where criminals could operate since it would be unregulated. Taxing authorities are concerned with – well, you know what they are concerned with. The same with regulators. They are always looking for something to regulate. But I think I understand why this is an important issue since criminal elements could emerge, et cetera.
The IRS is concerned that virtual currency may be used to hide unreported income. The IRS is studying the issue. It has yet to provide any specific guidance, although this past March it did say that it considers Bitcoin like owning shares of stock, but for tax purposes it is not money.
In terms of value, Bitcoin is something like a stock, in that its value can fluctuate wildly. As of mid-August, for example, one Bitcoin was just about $500, well under its all-time high of more than $1,000 at the end of November 2013.
It is hard to say how digital currency will evolve. Is it just a one-hit wonder? My guess is that it will continue to grow in use particularly when we are already seeing its acceptance by major retailers.
Randy McIntyre is a Certified Public Accountant and a partner in McIntyre, Paradis, Wood & Company, CPAs. He has worked in public accounting since 1977, in Wilmington since 1992. His firm is built on a history of service, technical expertise, and innovative to provide the expertise of larger firms with a personal, one-on-one approach. To learn more about McIntyre, Paradis, Wood & Company, see www.mpwcpas.com. He can be reached at [email protected]or 910-793-1181.
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