Several sensational scandals in the United States and abroad have increased U.S. and foreign governments' scrutiny of bitcoin, an expanding digital currency that critics say is ripe for criminal abuse.
Last June, the U.S. Marshals Service auctioned off 29,657 bitcoins seized in the October 2013 bust of Dread Pirate Roberts, the online name of Ross William Ulbricht.
From the San Francisco offices of his Silk Road firm, Ulbricht was allegedly using bitcoin in illegal drug trafficking on a hidden Internet service known as Deep Web because most search engines can't access it.
The Marshals Service received $18 million in its bitcoin auction from the Silk Road bust. For unknown reasons, the government kept 144,342 bitcoins, then worth $87 million but are now down to $43 million. Ulbricht's trial started last week.
In another spectacular case, Mount Gox, a Tokyo-based exchange that was handling 70 percent of all bitcoin transactions worldwide by 2013, abruptly suspended trading, shut down its website and filed for bankruptcy last February. About 850,000 bitcoins, worth $450 million at the time, went missing and were feared stolen.
Bitcoin proponents say it's unfair to point to such scandals as proof of the currency's unreliability. They note that cash, credit cards and stocks are misused for nefarious purposes without losing their legitimacy.
In other words, people commit crimes — not bitcoins.
These scandals and volatility led the Internal Revenue Service to begin regulating the currency. Last March, the IRS issued its first guidance for taxpayers on reporting bitcoin transactions.
Unlike the German government, the IRS classified bitcoin not as a currency but as a type of property, to be handled for tax purposes like real estate, stocks or other commodities.
That ruling means taxpayers and bitcoin exchanges will have to keep track of how much money is gained or lost between the time bitcoin is obtained and the time it's spent — the equivalent of capital gains or losses for stock transactions.