IRS: BITCOIN IS PROPERTY, NOT CURRENCY

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V17 2014 INDEX E-SYLUM ARCHIVE

The E-Sylum: Volume 17, Number 13, March 30, 2014, Article 27

Bob Leuver forwarded a story on the ruling that crypto-currency Bitcoin will be treated as property (rather than currency) by the Internal Revenue Service. Thanks. -Editor

The IRS has officially stated that bitcoin is a property – similar to any other valuable commodity – rather than a currency. What does this mean? Not much. In short, if you pay someone in bitcoin – in the same way you could pay them in gold – the wages are taxed accordingly. It is also not considered legal tender but a capital asset.

The key line is here: “A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.”

We will have more on this ruling as we approach tax lawyers and accountants who may have to soon deal with a new cohort of the “bitcoin rich.”

E-Sylum reader Leuver is a former director of the Bureau of Engraving and Printing. Former U.S. Mint Director Ed Moy wrote a blog post in response to the ruling. -Editor

The good news is that the IRS issued the first major ruling clarifying the tax treatment for bitcoin and presumably all crypto currencies. The long awaited guidance makes clear that for individuals, bitcoin will be treated like property, no different than gold or stocks. If held less than a year before being sold or used, the gain will be taxed at ordinary income tax rates. If held more than a year, the gain will be taxed at 23.8%. If sold or used at a loss, taxpayers can offset their future capital gains or up to $3,000 a year from ordinary income. This is a big benefit to those who made a bundle investing in bitcoin.

The bad news is that the IRS ruling is an obstacle to bitcoin’s growth as a currency. Complying with the IRS now means a lot of paperwork keeping track of all of a person’s transactions, even common everyday purchases (though I’m sure someone will eventually develop an app for this). Then for each transaction, a person has to figure out what the value of the bitcoin used when first acquired and subtract it from that day’s value of that bitcoin, can keep track of the capital gains or losses for the person’s individual tax return.

But that is not all. Bitcoin users will have to report to the IRS any transaction value above $600, and every instance where it is used for rent, salaries, wages, premiums, annuities, and compensation.

This will have a near term chilling effect on bitcoin’s use for retail purchases. Buying your morning latte is now a taxable event. However, I’m sure someone will eventually write an app to make the paperwork easy.

Finally, all this takes effect immediately and applies to all past transactions. Individuals can apply for relief on those past transactions if they can show “reasonable cause” for why they underpaid or not paid their taxes on bitcoin transactions. Seems to me that having no IRS guidance until now is a pretty good reason.