On Tuesday, the Internal Revenue Service ruled that it would tax Bitcoin as a property, not a currency.
Some see the move as helping to bring the medium into the mainstream. Now that bitcoins can be taxed, they’re reportable, and the legal ramifications of buying and selling a coin are clear.
The IRS’s decision, though, may end one of the great dreams of Bitcoin. The U.S. government will now subject owners of individual bitcoins to capital gains taxes: What they gain on buying or selling a bitcoin, they must pay taxes on.
To tax Bitcoin as property, he says, destroys its fungibility: One Bitcoin can no longer be exchanged for another.
This was one of the original intents behind the service. Bitcoin aimed to function as a kind of digital money, meaning it had to work as a unit of account, a medium of exchange, and a store of value. In reverse, that means:
As a store of value, Bitcoin’s price had to be predictably stable, such that you could neglect to spend a single bitcoin and know its value would not fluctuate wildly. In late 2013, many argued that Bitcoin’s quickly rising price kept it from functioning as a dependable store of value, but there were no technical or regulatory reasons it couldn’t function as such eventually.