So the IRS has finally issued important tax guidance for Bitcoin and it turned out exactly the way I suspected it would. By treating Bitcoin as “property” and not “currency” the IRS is saying that anyone who bought a bitcoin for a certain price and then spends it at a higher price is responsible for capital gains on the appreciation. Like with stocks, there will be a lower tax rate applied to BTC that has been held for more than a year. Miners will have to treat the bitcoin they receive as ordinary income.
The reason I am not surprised by the ruling is that it positions the IRS to gain as much as possible from early adopters sitting on huge gains. On the other hand, it may also encourage some people to spend their BTC “off the books.” Finally, it creates a gigantic pain in the ass for people spending BTC, particularly in years past.
As far as impact, I don’t expect there to be much of one. Since I anticipated this outcome, I am fairly certain most people in the Bitcoin community did as well. What I now expect to happen, is entrepreneurs will create user friendly software that will automatically account for your gains and losses so that individuals can have this recorded automatically.
One question that I still have is what happens to the BTC that miners earn and then spend. They are already taxed on the income, so are they taxed again when they spend it? I would guess the answer is yes, but I’m not sure. Would love to hear reader thoughts.
From Bloomberg:
The U.S. government will treat Bitcoin as property for tax purposes, applying rules it uses to govern stocks and barter transactions, the Internal Revenue Service said in its first substantive ruling on the issue.
Today’s IRS guidance will provide certainty for investors, along with potential income-tax liability. Under the ruling, purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of income for the coffee shop.
The IRS, faced with a choice of treating Bitcoins like currency or property, chose property.
Under the IRS ruling, Bitcoin investors would be treated like stock investors. Bitcoins held for more than a year and then sold would pay the lower tax rates applicable to capital gains — a maximum of 23.8 percent compared with the 43.4 percent top rate on property sold within a year of purchase.
For investors with losses, U.S. tax law allows taxpayers to subtract capital losses from any capital gains. They can also subtract up to $3,000 of capital losses a year from ordinary income.
Bitcoin miners would have to report their earnings as taxable income with a value equal to the worth on the day it was mined. If they mine as part of a business, they would have to pay payroll taxes as well.
The ruling takes effect immediately and covers past and future transactions and tax returns. The IRS said in the notice that it may offer relief from penalties to people who engaged in transactions before today and can show “reasonable cause” for any underpayments or failure to file.
Full article here.
In Liberty,
Michael Krieger
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The IRS Rules on Bitcoin – Taxed as Property Not Currency originally appeared on A Lightning War for Liberty on March 25, 2014.
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