Property or Currency? The IRS Weighs In On the Bitcoin

AMA3-29-14It’s been said that nothing’s certain but death and taxes, and while the former may not apply to the Bitcoin, the latter certainly does. The IRS has caught up with the ever-growing virtual currency. And the tax police’s new guidelines only add to the questions about what to do with the digital challenger to the world’s traditional currencies.

We’ve been following the Bitcoin’s progress for some time, as it matures into a viable form of commerce and stumbles into controversy and criticism from governments and institutions around the world. And as those entities struggle to come to grips with the growing popularity

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of Becton, they reveal some insights into Bitcoin’s future as a free and democratic form of exchange that’s independent of those very institutions.

The latest twist in the Bitcoin saga involves the Internal Revenue Service’s debate over how to classify the digital currency for the purposes of taxation. That’s an important consideration, given the way Bitcoin values have jumped over the past year or so.

The result? Bitcoins are property, not money. That means that in general the regulations that apply to property transactions apply to transactions that use Bitcoins. So, Bitcoins can be subject to the same tax rates and penalties as ordinary income or assets that are subject to capital gains taxes in most cases.

Those cases depend on whether a user holds Bitcoins as a capital asset, like stocks or bonds, or as inventory or other property. If they’re considered an asset then capital gains taxes apply – a different category of taxes than the “ordinary’ gains and losses from inventory.

But because Bitcoins are created and circulated independent of regulatory authorities or central banks, there’s no actual controlling body that can establish standards for how Bitcoins should be treated for tax purposes in the US and other countries. That freedom from government or private regulation is both the Bitcoin’s greatest strength and one of its greatest weaknesses, as we’ve seen from the spate f recent scandals and crashes of major Bitcon exchanges in various parts of the world.

Those who conduct transactions using Bicoins aren’t the only ones affected by the IRS determination. The tax guidelines also hit the growing number of Bitcoin “miners,” who work to create their own stashes of Bitcoins by cracking the complex algorithms that generate the coins.

Now, miners will have to declare their Bitcoins as income, with taxation based on the fair market value of the currency at the time it was mined. Since Bitcoin values fluctuate so greatly, that means miners could take a loss if those values have plummeted after the coins were mined.

Accounting firm Price Waterhouse estimates that up to 80,000 Bitcoin transactions take place every day, involving everything from property to payment for services. That means it’s a good time to take Jason Hartman’s advice to stay informed and watchful as the Bitcoin – and attempts to regulate it – continue to evolve. (Top image:Flickr/bitkeychain)


Drawbaugh, Kevin and Patrick Temple-West. “Bitcoins Are Property, Not Currency, IRS Says Regarding Taxes. Reuters US. 25 Mar 2014

Read more from The American Monetary Association:

Can Bad Credit Crush Job Applicants?

Exchange CEO’s Suicide Adds to Bitcoin Turmoil

The American Monetary Association Team


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