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.
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.