Bitcoin

Way back in December, on a whim, I listened to two one-hour podcasts on Bitcoin, figuring it might come into play for the upcoming tax season. Turns out I was right, but way overestimated the impact. My three-man office does about 900 returns by April 15, and it so happened that one, and only one, person had investment income from bitcoin.

How does the IRS handle it? Just like any other type of investment income. For now.

Below is a pretty good introduction to Bitcoin. I’ve listened to it over the past three days during my morning walks. They say the best indicator of how well you know a subject is if you can teach it. Well, I certainly can’t teach you bitcoin; maybe, just maybe, I can pass a multiple-choice exam on it. But it is fascinating, and the 25-minute video will fill you in on the gist of the cryptocurrency:

I have two big questions, though. First, when they say that bitcoin is trading at 1 Bitcoin = $8,126.44 (as it is now as I’m writing this), is that “trade” something that happens within the bitcoin realm or on some market exchange outside it? Within the blockchain, or between a bunch of Wall Street firms trading pieces of paper. And if the “trade” transaction is within the blockchain, how is the value to the dollar determined?

Second, as per the video, when you have two blockchains to evaluate, the rule of thumb is to always treat the longer chain, the one that’s had the most work done to it, as the valid one. So what then happens in this situation:

Chain 1 has 10,000 transactions and ends with A, B, C, D, and E.

Chain 2 has those same 10,000 transactions but ends with X, Y, and Z.

You’d treat Chain 1 as the valid blockchain. (Remember, a blockchain is a public, online ledger.) What then happens to transactions X, Y, and Z? How do they make their way onto the valid ledger? 

Or am I missing the boat completely here regarding the mining process? (“Mining” is simply bitcoinspeak for adding transactions to the blockchain, which must be done with some heavy duty computer processing power since it involves cryptography and algorithms ranging up to 2^256 power.)

The quest for knowledge continues …