The IRS has news for Bitcoin holders: The virtual currency isn't considered currency for tax purposes -- it's property.
The Internal Revenue Service announced Tuesday that since Bitcoins and other virtual currencies have no legal tender status in any jurisdiction, they cannot be classified as "currency," reports Reuters. Instead, the IRS explained that Bitcoins can be treated like taxable property.
With Tax Day looming, how will Bitcoin holders need to report their virtual riches?
Bitcoin Like Other Investments
By considering Bitcoin as "property" for federal tax purposes, in many ways, Bitcoins will be treated like other investments. In a press release Tuesday, the IRS noted that paying for work in Bitcoins is taxable:
- Wages paid to employees in Bitcoins are taxable to the employee and must be included in the employee's W-2 Form.
- Payments to independent contractors in Bitcoins are taxable and typically must be accounted for in Form 1099.
When calculating gross income, taxpayers well need to determine the fair market value of their Bitcoins in U.S. dollars at the time when they received them. However, like stocks and bonds, if you use Bitcoins to buy something or sell Bitcoins to receive U.S. dollars, you may have to pay capital gains tax if you made money in the deal.
Then again, if you lost money in a Bitcoin transaction, then you may qualify for a capital loss deduction.
Bad News for Bitcoin 'Miners'
New Bitcoins are "created" when Bitcoin "miners" run special software designed to help Bitcoin users process transactions faster. Some individuals have decided to make "mining" a business, much like stock traders, but the IRS requires Bitcoin miners to report every "mined" Bitcoin as income.
A lawyer for one virtual currency startup company told Reuters that this is going to make life difficult for miners. Because income in Bitcoins is determined based on the date you received the virtual currency, miners will have to "include in income the fair market value of the virtual currency on the date they mined it," the lawyer said.
As an experienced tax lawyer would likely explain, any increase in value in Bitcoins gathered by miners would be seen as capital gains, and should be subject to capital gains tax. With these new limits on miners and Bitcoin investment, this new IRS guidance may spell the end of the Gold Rush era of Bitcoins.
- I.R.S. Takes a Position on Bitcoin: It's Property (The New York Times)
- Should Your Business Accept Bitcoin? (FindLaw's Free Enterprise)
- It's Official, Bitcoin is Money, Honey (FindLaw's Technologist)
- Bitcoin Phishing Email Alert: 3 Red Flags It's a Scam (FindLaw's Common Law)