Bitcoin is not currency according to the IRS. The IRS today released IR-2014-36, its long-awaited guidelines on Bitcoin and other crypto-currencies. According to the IRS, the sale or exchange of Bitcoins or any other crypto-currency , or the use of Bitcoins to pay for services will have tax consequences, that will result in a tax liability. According to the IRS, any virtual currency will be treated like property, and not currency, for tax purposes.
In other words, purchasing a $2 soda with Bitcoins bought for $1 would incur a capital gain of $1 for the soda purchaser and $2 in revenue for the seller of the soda. It gets even more complicated for those who bought Bitcoins at its peak lows and sold at its peak highs. For example, an investor purchases Bitcoins at $16 and sells for $1,000, would have a taxable capital gain of $984. It would then be declared as a short-term capital gain or a long-term capital gain on the investor’s tax return. If the investor held the Bitcoins for over one year, it would be declared as a long-term capital gain with favorable tax rates. If it was held for less than one year, it would be declared as a short-term capital gain, and taxed as ordinary income.
Therefore, if an investor who purchased Bitcoins at $31.91 on February 28, 2013 and sold today at $600, would not incur any capital gains, if he is married and his taxable income is under $72,500. This sale would be considered a long-term capital gain as the asset was held more than a year. High income taxpayers would pay no more than 19.6 percent tax on any long-term capital gain. If a different investor purchased the same Bitcoins at $31.92 on February 28, 2013 and happened to sell their Bitcoins on November 29, 2013 for $1,124.76, they would incur a short-term capital gain, and would be taxed anywhere from 10 percent to 39.6 percent depending on their income. This will be very complicated for many Bitcoin investors who thought that they were owning currency, and not property or capital assets.
The IRS guidelines seems to be in conflict with the ruling of a US District Judge in Texas. In August 2013, US District Judge Amos Mazzant ruled that Bitcoins are in fact a currency or form of money. The IRS guidelines appear to mirror the position taken in August 2013 by the German Finance Minister who characterized Bitcoins as being subject to capital gains. The IRS guidelines are not law. They are only guidelines, subject to interpretation. There will likely be court challenges to the IRS’s characterization of virtual currencies as property.
The IRS guidelines will also cause havoc for the computer programmers who mine for new Bitcoins . IRS guidelines call for the Bitcoin miners to include in their income the fair market value of the Bitcoins on the actual date that they mined it. That may be difficult for some to determine that actual date.
It will take years for the final word or whether Bitcoins are not currency, as is the current position taken by the IRS. The matter will likely end up before the United States Supreme Court for the final decision.
By John J. Poltonowicz Twitter