IRS Rules Bitcoin Is Property (Not Currency)

Tyler Durden's picture

After less than three months consideration, the IRS has issued its statement clarifying th etax treatment of Bitcoins (and other virtual currencies) before the April 15th Deadline. The finding, summarized, is that Vitual currencies will be treated as property (not as a currency) which, as WSJ notes, means an investor who buys bitcoin would typically have a capital gain or loss when it’s sold. The price of Bitcoin is rising modestly on this news...

 

As Bloomberg explains:

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.

 

...

 

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.

As with stocks, Bitcoin dealers would be subject to different rules that wouldn’t allow for capital gains treatment.

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.

And here is WSJ's Q&A:

How is virtual currency treated for federal tax purposes? 

Bitcoin and other virtual currencies are treated as property, not as a currency. Therefore, an investor who buys bitcoin would typically have a capital gain or loss when it’s sold but wouldn’t have foreign-currency gains and losses.

If a taxpayer receives a payment in virtual currency, is it considered income?

Yes, the fair-market value of the currency (in U.S. dollars) on the date the payment was received is considered to be income. For more information on exchange rates, see the notice.

Does a person who makes a payment using bitcoin have a gain or loss on the transaction?

Yes, typically. For example, say a person buys $5,000 of bitcoin, which then doubles in value. If she then uses the bitcoin to pay a $10,000 tuition bill, she could have a $5,000 taxable capital gain on the transaction.

This clarification means that people who use bitcoin in small amounts, such as to buy a meal, could face onerous record-keeping issues.

Is a person who “mines” a virtual currency considered to have received income?  

Yes, and if the taxpayer engages in mining as a trade or business, self-employment tax is often due.

Does virtual currency that’s paid by an employer in return for services meet the definition of wages for payroll-tax purposes?

Yes, and it’s also subject to income-tax withholding.

Must payments made in bitcoin be reported to the IRS? 

Yes, if they meet the requirements for information reporting on payments made in property. Typically, the threshold is payments of $600 or more.

Will taxpayers be penalized for having treated bitcoin transactions in a different manner before today’s notice?

They could be, especially if they underpayed tax or didn’t report income, or both. But the IRS noted that penalty relief “may be available” to persons who were required to file information reports but didn’t, if there’s a reasonable cause for the nonfiling.

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fonestar's picture

MOAR BITCOIN!!!

 

Bitcoin will outlive your "IRS" and government!!

Hippocratic Oaf's picture

Hard to swallow MOAR bad news, huh?

fonestar's picture

Do you know why this "decision" hasn't effected Bitcoin price?

It's because America doesn't matter.

Pladizow's picture

Good luck to both sides on keeping track of these taxes!

DoChenRollingBearing's picture

Yep, run yr BTC through a mixing service and see if someone will sell you gold for BTC!

StacksOnStacks's picture

GET YOUR CBA NOW (CERTIFIED BITCOIN ACCOUNTANT)

Stackers's picture

Would you claim capital gains or as a "collectible" like gold and silver ?

flacon's picture

Who the fucking hell is the "Eye Are Ess" to make any determinations over BitCoin! Fuck you tax men! 

(I don't own BitCoin, but I detest this sort of "tax" (THEFT)) Did any one at the IRS put their own money at risk for this "tax"? If you win you lose and if you lose you lose. Goddamned shit system we live in these days! 

SoberOne's picture

Only three truths in this world: death, taxes, and Barry Sotero's homosexuality.

Dead Man Walking's picture

you forgot the fourth. His wife is a man.

smlbizman's picture

they will tax invisible non existence property

Unknown User's picture

This ruling looks unenforceable since BTC transactions are anonymous.

outamyeffinway's picture

The IRS may regret this when their data entry clerks protest at the thousands upon thousands of micro transactions they have to enter off of the Schedule C's. Well they should have some personnel they can pull from the ACA side of things considering how many people are signing up.

N2OJoe's picture

Which is just another excuse to expand the beauracracy, Outa.

 

"The beauracracy is expanding to meet the needs of the expanding beauracracy."

fonestar's picture

Well anonymity really just pertains to the users.  It's the ability to tie addresses to real people which is where any Bitcoin taxation attempt would become impossible.

fonestar's picture

A fonestar is standing by!

ORDER NOW!!!!

August's picture

Just file a request with the NSA for your annual BTC transaction summary.

slightlyskeptical's picture

But i thought all my transactions were confidential?

/s

fonestar's picture

And how would they go about that moron?  Easy to talk shit with no facts to back it up isn't it?

fonestar's picture

There's just no way any auditor can deal with the complexity involved in the Bitcoin network, the multiple addresses and address-to-person fiasco.  There's just no way anyone on Earth can deal with it.

Mr Pink's picture

The IRS is kidding themselves if they think they can prove ownership of BTC. 

pods's picture

The problem is that you cannot disprove ownership.

In Amerika, you are guilty until you prove innocence or they get bored assraping you, whichever comes last.

pods

fonestar's picture

Disprove ownership?  Uh what?  Why would you even need to store your c0inz on your EDC laptop?  Pretty evident you're out of your depth discussing Bitcoin.  Leave it to the real virtual men here.

eclectic syncretist's picture

Leave it to the NSA, or the hackers who got all of the GOX bitcoins.  What did the real men who had bitcoins in Mt. GOX get dumbass.  They got robbed!

fonestar's picture

Who fucking cares?  Someone got robbed and someone else got rich as shit!  Why the fuck should fonestar care?

Mr Pink's picture

So if you sell an oz of gold to a local coin dealer for $2000 you bought from a coin dealer for $800 are you going to report it?

Can you prove you didn't own it?

A lot of boating accident talk around here but when it comes to bitcoin then the almighty IRS is gonna git chu!

Theta_Burn's picture

When you spend it with a legitimate buiness, who will now need to comply via the IRS requiring a bitcoin user sign-up sheet.

To you guys it is intrinsic value, to the IRS its intrinsic property.

fonestar's picture

Hey, those straws you were grasping?  Yeah, they're pressing sexual assault charges....

NidStyles's picture

You really do not get it, do you? Who do you think made the USD the defacto currency? It wasn't the government that forced people to adopt it. It was the IRS and taxation. 

This move by the IRS negates any real benefit of doing business with Bitcoins for all legitimate businesses. That means your economic fantasy has been and no further more is still dead on arrival. Bitcoin never had a chance because it's based on the very system that is flawed in the first place.

fonestar's picture

Oh look, the fake anarchist!

NidStyles's picture

Hey anytime you want to chat about some Rothbard, Spooner, Marx, or anyone that wrote in the Libertaire, let me know. We can speak openly here all day long sir. 

Matt's picture

All this does is create incentive for a software developer to create a tool for record keeping, for merging the blockchain records with a spreadsheet and annotating the transactions.

The benefits to the business are still:

1) irreversible (unless the business chooses to)

2) lower transaction fees than credit cards, etc.

3) built in record of all transactions, at least on a incoming/outgoing level, with redundant records stored worldwide

NidStyles's picture

Which is the exact opposite that the bitcoin fanatics claim bitcoin is. 

 

I've been around long enough to know a pump-and-dump mechanism when I see one, and it's based upon the value of the currency that you are exchanging into except priced in dollars. So no matter what, you are still buying into the dollar. Whether it be with real world goods or virtual goods, you are still exchanging your bitcoin for it's value measured in dollars. 

 

That is the intrinsic flaw with bitcoin. If you also factor in the IRS going jacked boot and making it impossible for you to trade cash for bitcoin tax free like you can with gold and silver, Bitcoin is fucked.

 

Educations are wonderful things. Fonestar either needs one, or he's a mole of sorts.  

FinalEvent's picture

I'm into bitcoin and don't give a FUCK about the fiat value.

It all depends on if you die with cryptocurrencies or with fiat in the end.

1 ounce is 1 ounce, 1 BTC is 1 BTC (if both kept in private storage)

eclectic syncretist's picture

Bitcoin is a scam against libertarians, and you are the the scammer in chief who should be dragged out into the street and beaten by everyone who has been or will be scammed by the bitcoin pealess shell game.

fonestar's picture

Your mind is a scam perpetrated against empty spaces.

Matt's picture

So, as a "Libertarian", you do not believe that people should be free to negotiate whatever currency they want for a transaction between two consenting parties?

eclectic syncretist's picture

You can do whatever you like, you can throw all you fiat away or take a dump all over it for all I care.  What I don't like is hucksters scamming the good people of zero hedge, as phoneystar is attempting to do.

Jonas Parker's picture

Gee Mr. IRSman, there's just no way any auditor can deal with the complexity involved in the Bitcoin network, the multiple addresses and address-to-person fiasco.  There's just no way anyone on Earth can deal with it. Fonestar said so!

Uh, so does that let me off the hook?

Drifter's picture

I don't think that aspect is addresed in the article, the ruling merely says how IRS views bitcoin, along with the usual "it's your obligation to report gains and losses". 

No, I don't see any way they can tie bitcoin transactions to a person just on wallet ID.

Not yet anyway.

BLOTTO's picture

Warren Buffett on bitcoins:

.

Stay away from it. It's a mirage, basically. It's a method of transmitting money—a very effective way of transmitting money. You can do it anonymously and all that. A cheque is a way of transmitting money, too. Are cheques worth a whole lot of money?

I hope bitcoin becomes a better way of doing it. But you can replicate it a bunch of different ways, and it will be. The idea that it has some huge instrinsic value is just a joke in my view. There's dollars on both ends.

fonestar's picture

Warren Buffett, "Stay away from Bitcoin, my buddies don't get their skim!"

DoChenRollingBearing's picture

That means if I (quickly) buy some gold with some of my BTC I can take even further losses on my 1040!!

Too bad IRS!

fonestar's picture

fonestar always smirk when people in the office talk about Buffett with reverence.  He's a has been, trillionaire's boy toy... chose a ukulele instead of a pipe to lead the sheep astray.

NidStyles's picture

Yet he's been wealthy for a long time, and you still aren't even wealthy yet. Sooo, that sort of tells me that you might be a bit angry and jealous of him..

Quus Ant's picture

did you choose the pipe?