Last week's IRS ruling means bitcoins are not fungible, therefore unworkable as a currency
Bitcoin Tax Ruling — The IRS has spoken: Bitcoins are property, not currency. This was hardly a surprise, but it has some important implication that tells us a lot about what it takes to make a currency work.
Context & Ripple Effects
The IRS's March 25, 2014 announcement classifying bitcoin as property rather than currency closed out a sequence of regulatory rulings, each carving off a different function of the coin: in December 2013 FinCEN exempted miners from money-transmitter registration, and in January 2014 Canada declared bitcoin is not legal tender. What Credit Slips adds is the analytical point: taxing each coin disposal at its own cost basis breaks fungibility — two identical bitcoins carry different embedded tax liabilities depending on when they were acquired.
The story travelled unusually wide for a tax-guidance item, picked up the same week by Forbes, the Guardian, The Atlantic, Ars Technica, TechCrunch and others, and CoinDesk's companion explainer walked taxpayers through what the guidelines mean in practice. The debate is over whether a unit whose tax consequences vary by holder history can still serve as a medium of exchange.
First-order effects
- US bitcoin holders now owe capital-gains accounting on every transaction — spending a coin means realizing a gain or loss against its specific acquisition cost, a recordkeeping burden that did not exist under a currency treatment.
- Tax-prep entrepreneurs are already stepping in: Forbes reported the same week that startups were building tools to help taxpayers track bitcoin transactions and comply with the guidance.
Second-order effects
- Merchants accepting bitcoin bear the same per-transaction accounting overhead, tilting the cost comparison toward dollar-denominated payments and pushing bitcoin usage toward holding and speculation rather than everyday settlement.
- Exchanges and wallet providers face pressure to supply lot-level cost-basis records as a feature, since customers cannot comply without them — turning tax reporting into a competitive requirement rather than an afterthought.
Third-order effects
- Regulators are defining bitcoin function by function rather than wholesale — FinCEN on miners, Ottawa on legal tender, the IRS on taxation — so its viability as a currency will be settled piecemeal across agencies and borders instead of by any single ruling.
- If major jurisdictions diverge in their classifications, cross-border arbitrage over tax treatment becomes a structural feature of the market, pressuring governments to coordinate or compete on how virtual currency is categorized.
The trend: Governments are dismantling bitcoin's currency claim one regulatory function at a time, with tax classification emerging as the decisive test of whether a bearer asset with heterogeneous histories can circulate like money.