Bitcoin to be Taxed as Property, not Currency

Just in case you missed this in the news this week, the Internal Revenue Service made a ruling that will have an effect on the future of Bitcoin (and all virtual currency). They ruled Bitcoin to be “property, not currency,” which thereby makes it subject to regulation in the United States.

In case you’re not familiar with Bitcoin, it is a kind of digital currency. It allows payments to be made in a completely decentralized manner, apart from conventional lending institutions. The Bitcoin network is not controlled by anyone, and that is part of the allure.

Until now, the IRS has admitted they weren’t quite sure how they were going to deal with Bitcoin from a tax standpoint. While in some environments virtual currency operates just like real money, it was different enough to cause everyone to think long and hard about how it should be dealt with. However, they’ve now reached a very firm decision that is effective immediately.

With the IRS ruling now in place, Bitcoin users are now subject to capital gains and income taxes. Strict record-keeping rules have also been put in place to ensure users are not taking advantage of anything “off-the-books.”

The IRS has declared it will treat Bitcoin like any typical stock or other intangible property. In situations where it is held as an investment, the holder will be charged capital gains taxes where gains are shown. Retailers will need to record Bitcoin receipts on a W-2.

Additional rulings are as follows: Should an independent contractor be paid with virtual currency, self-employment rules generally apply (form 1099). Regular wages paid out still need to be reported by the employer on a form W-2 and are subject to regular withholding.

Failure to comply with these new IRS regulations will result in fines. Interestingly, however, they did throw in this caveat: they say they will allow some degree of leniency for a person’s failure to file in the past “if there is reasonable cause.” It will be interesting to see exactly what that means in the coming months.

Bitcoin has recently begun losing much of the momentum it had gained. First, it was the recent victim of a multimillion-dollar theft, which forced the bankruptcy of Mt.Gox (the world’s largest Bitcoin currency exchange). This recent development will certainly not help.

To get access to a comprehensive set of virtual currency questions and answers, please review this IRS document.