Bitcoins and the IRS: Walmart's Problem

It's time for me to revisit the story of bitcoins. As you may have noticed -- or not have noticed -- you don't hear much about bitcoins these days.

A bitcoin used to be worth about $1100. These days, it is worth $250. The price has settled into this range for most of the year. It's boring. The financial media have dropped the topic. So has the hard money community.

I was an early critic of bitcoins, which earned me the hostility of the bitcoin community, which was small then and remains small.

TAXABLE EVENTS

I want to talk about what should be obvious to anybody. Every time some retailer or wholesaler sells something in exchange for bitcoins, this creates a taxable event. The IRS is highly interested in taxable events.

As you know, the IRS taxes people in United States dollars. It taxes businesses in terms of profits made in United States dollars. This is why every business has to keep an account of whatever it has paid out in United States dollars, which constitutes a deductible business expense. At the same time, every business has to keep a record of how many dollars have come in from sales.

This means that every business that does business in bitcoins must keep a record of the price of the bitcoin in terms of dollars at every point of sale or point of purchase. The IRS wants to know how many dollars came in or went out. It is not interested in bitcoins.

This creates huge problems for any business that wants to use bitcoins. Its computerized point-of-sale software must have a conversion system for bitcoins into United States dollars. When somebody buys something from the retailer, and he uses bitcoins to make the purchase, the retailer's software must instantly convert the value of the bitcoins into the value of United States dollars. The businessman is going to be taxed in terms of the value of the bitcoins in United States dollars.

This is obvious, isn't it? But the implications are not obvious.

If you want to get some estimate of the number of businesses that are using bitcoins as part of their operations, you must find out how many businesses have incorporated a conversion system that records the value of the bitcoins at the point of sale. This means barcode software.

Here is what I have discovered: there is no such barcode conversion software available.

This means that no national retail business sells anything for bitcoins. It also means that no small business does, unless its barcode software is integrated with conversion software that enables the business to find out exactly how many dollars came in when somebody purchased something. In other words, until the small business barcode software has built-in bitcoin conversion, bitcoins will remain a dream in the minds of bitcoin enthusiasts.

Here is an article written by a bitcoin enthusiast for small businesses. It discusses integrating bitcoin purchases with QuickBooks. If you want to read incoherent gibberish, read this. I dare you.

Try to find any small business that uses QuickBooks that has integrated this plan for the business operations. The next one will be the first one.

But QuickBooks is a minor issue. The major issue is barcode software.

We were told from the beginning that bitcoins would soon be used for retail businesses. Try to find a store that has anything visible that says it accepts payments in bitcoins. If you find one, ask the person at the checkout counter how many people are using bitcoins to buy something. He will never have heard of it.

PRIVACY

There is no privacy with respect to bitcoins if you are a retail merchant. All the talk about gaining privacy with bitcoins refers only to consumers. None of it refers to businesses.

A business has to defend every deduction, and the business has to defend every purchase. You don't see Walmart, or Target, or any other national business set up to use bitcoins. That's because their point-of-sale software does not have automatic conversion into bitcoin prices.

I have said from the beginning that the use of bitcoins would be limited to a handful of computer programmers and the Mexican drug cartels. They don't report to the IRS. Any normal business reports to the IRS, and it has to account for its sales and purchases, not in terms of bitcoins, but in terms of United States dollars. This means that there will be no adoption of bitcoins until there is a huge market of consumers who use bitcoins, because of the cost of rewriting all of the point-of-sale software to deal with the problem of the conversion factor. This is the chicken-and-egg problem that the bitcoins movement face. There will not be large numbers of bitcoin users until Walmart and Target and similar national chains make available their products in exchange for bitcoins.

Until you see major national chains adopting point-of-sale software that provides automatic bitcoin conversions, you can safely ignore bitcoins. Still.