On Bitcoin and Taxes

Dear Congresswoman Jayapal,

I am getting into investments using cryptocurrencies like Bitcoin, and I have been researching how to pay taxes on the gains from various investment opportunities in that industry.  The IRS has come out with some guidelines related to virtual currencies, most notably "Notice 2014-21".  I have a number of questions that I will be addressing directly to the IRS on the subject of income taxes and capital gains taxes, but I wanted to bring your attention to one aspect of the Notice that caught my attention, with the hope that you will be able to consider the implications and draft legislation to address my concern.

I would like to present two of the questions from Notice 2014-21, questions 6 and 8:

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Question 6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?

Answer 6: Yes.  If the fair market value of property received in exchange for virtual currency exceeds the taxpayer's adjusted basis of the virtual currency, the taxpayer has taxable gain.  The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.  See Publication 544, Sales and Other Dispositions of Assets, for information about the tax treatment of sales and exchanges, such as whether a loss is deductible.
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Question 8: Does a taxpayer who "mines" virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?

Answer 8: Yes, when a taxpayer successfully "mines" virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.  See Publication 525, Taxable and Nontaxable Income, for more information on taxable income.
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The first question is dealing with capital gains, the difference in value between when the virtual currency is bought and when it is sold.  The second question is dealing with taxes upon generation of the virtual currency.

This would mean that gains from mining, even cloud mining contracts that people may purchase around the world, need to be tracked for tax purposes so that the fair market value of the coins generated by the mining can be determined according to basic accounting rules, whether that be First In First Out or some other method.  However, it also means that any transactions conducted in bitcoin for real world goods and services would be subject to capital gains taxes on the difference between when the coin was generated and when it was exchanged for real currency or goods and services worth fair market value.  That sounds to me like double taxation.

I would be interested in discussing this at some point if you are interested and in town.  I know that a lot of people are getting into these currencies, and ensuring that the rules are fair would make it easier for a lot of people to pay the taxes they owe so we can get on with growing the economy.

Also, I wish that the taxes we paid on bitcoin generation like mining could be paid IN bitcoin.  That might actually be kind of cool.  Might also help balance the federal budget.  Just a thought.