don't tempt them. they have all our money and love wasting it on frivolous shit. poke the bear too much, and they may retaliate.

Section 988 of the IRS Internal Revenue Code is in general titled "Treatment of certain foreign currency transactions." The general principle of that section is that "any foreign currency gain or loss...shall be...treated as ordinary income or loss." However, it outlines a bunch of exceptions, one of which is sometimes called the “de minimis” exemption:

There’s a lot of legalese there so let’s unpack it, starting with “nonfunctional currency.” This document helpfully defines what the tax code means by functional currency: “Generally, [taxpayers] must make all determinations…relating to income taxes…in [their] respective functional currency. … The dollar shall be the functional currency of [most] taxpayer[s]...regardless of the currency used in keeping [their] books and records.” Basically, your country’s “functional currency” is the one in common use, and any other currencies are “non-functional” currencies.

For a long time, bitcoin didn't fit the first part of this exemption because anyone who tried to say bitcoin is a nonfunctional “currency” would get tripped up on the currency part. A judge, for example, would ask what country accepts it for payment of all debts, public and private. The bitcoiner would have no answer, and the judge could then just say, “Nice try, but bitcoin is clearly not a currency.” But now, bitcoin is legal tender in el salvador (including for government bills), so we can say it is currency there. That means bitcoin now fits the first condition in this exemption: it is a nonfunctional currency disposed of by some individuals in some transactions.

The second part says the exemption only applies to personal transactions. A personal transaction is defined as “any transaction entered into by an individual” (as opposed to a business) and not including a self-employed person’s business expenses (or what would be business expenses if that person’s business was incorporated -- for more info see the full definition here).

Given these definitions and conditions, the exemption applies to bitcoin in this way:

If a person (“an individual”) spends his bitcoins (“nonfunctional currency”) for everyday reasons (“personal transactions”), then it can’t be taxed (“no gain shall be recognized”) just because it appreciated in value (“by reason of changes in exchange rates”) after he acquired it (“after such currency was acquired...and before such disposition”) unless the value of the appreciation exceeds $200 (“[That] does not apply if the gain...exceeds $200”).

Since bitcoin is a foreign currency now, taxpayers can legitimately not disclose their bitcoin expenditures to the IRS as long as the gains on each transaction are below $200. That is beneficial for privacy and an incredible boon to the usefulness of bitcoin. Note well: no other cryptocurrency gets this exemption because no other cryptocurrency is a foreign country's legal tender.

That's why privacy is so important. I wish people got the importance of this more. Many will have to learn the hard way.