Bitcoin has been in a "legal grey area" since its inception, and at least one court and the SEC have characterized the virtual currency as money. As Bitcoin gained popularity, so has the question of its validity, and recognition by the government.
Late last year, the Department of Justice described Bitcoin as a "legal means of exchange," says Bloomberg, while this past February, the United States Postal Service Office of Inspector General held a webinar last week to "explore the possibilities" of providing non-banking financial services, including "providing [B]itcoin exchange services at post offices," according to Main Street.
Yesterday, just weeks before the April 15 personal income tax deadline, the IRS took a position on the issue and released "IRS Virtual Currency Guidance," and accompanying question and answer Notice 2014-21. Here are some of the major takeaways.
1. Property, Not Legal Tender
First things first, the IRS drew a clear line in the sand when it said that, "In some environments, virtual currency operates like "real" currency ... but it does not have legal tender status in any jurisdiction." The IRS added, "The notice provides that virtual currency is treated as property for U.S. federal tax purposes."
2. Capital Gains
Since Bitcoin will be treated as property, similar rules will apply to Bitcoin investors as they do to stock investors, reports Bloomberg. Describing the type of tax liabilities triggered by a transaction using Bitcoins, Bloomberg explains: "Purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of gross income for the coffee shop."
3. Employment Tax
If Bitcoins are paid to employees as wages, then those payments "are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes." If one is a Bitcoin "miner" then he will be subject to self-employment tax.
There are several repercussions from the IRS's stance on Bitcoin. First, some see this as a step down the path to legitimacy. On the other hand, others who relished in Bitcoin's anonymity probably won't be too pleased, according to The New York Times. One securities analyst noted, "The people that feel ideologically that Bitcoin should be free of all regulation aren't going to be happy."
But you can't have it both ways. They should know, like death, taxes are inevitable.
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