Bitcoin was previously something like Schrodinger’s currency. Without regulatory observers, it may claim to be money and property at the same time.
Now the Internal Revenue Service has opened the box, and the virtual currency’s condition is made – at the very least for federal tax purposes.
The IRS recently issued guidance how it will treat bitcoin, and any other stateless electronic competitor. The short answer: as property, not currency. Bitcoin, as well as other virtual currencies which can be exchanged for legal tender, will now be treated generally as a capital asset, and in a few situations as inventory. Bitcoin holders who’re not dealers is going to be subject to capital gains tax on increases in value. Bitcoin “miners,” who unlock the currency’s algorithms, will have to report their finds as income, in the same way other miners do when extracting more traditional resources.
Though this decision is unlikely to cause much turbulence, it’s worth noting. Now that the IRS has made a phone, investors and bitcoin enthusiasts can progress with a far more accurate comprehension of what they are (virtually) holding. A bitcoin holder who wants to adhere to the tax law, rather than evade it, now knows how to do so.
I believe the IRS is correct in determining that bitcoin is not money bitcoin mixer. Bitcoin, and other virtual currencies want it, is too unstable in value because of it to realistically be called a form of currency. In this era of floating exchange rates, it’s true that the worth of almost all currencies changes from week to week or year to year in accordance with any particular benchmark, whether it’s the dollar or perhaps a barrel of oil. But an integral feature of money is to serve as a store of value. The worth of the cash itself should not change drastically from everyday or hour to hour.
Bitcoin utterly fails this test. Buying a bitcoin is just a speculative investment. It is not a place to park your idle, spendable cash. Further, to my knowledge, no mainstream financial institution will pay interest on bitcoin deposits in the proper execution of more bitcoins. Any return on a bitcoin holding comes solely from the change in the bitcoin’s value.
Perhaps the IRS’decision can help or hurt current bitcoin holders depends upon why they wanted bitcoins in the first place. For anyone hoping to profit directly from bitcoin’s fluctuations in value, this really is good news, as the rules for capital gains and losses are relatively favorable to taxpayers. This characterization also upholds the way in which some high-profile bitcoin enthusiasts, like the Winklevoss twins, have reported their earnings in the lack of clear guidance. (While the new treatment of bitcoin is applicable to past years, penalty relief might be offered to taxpayers who is able to demonstrate reasonable reason for their positions.)
For anyone hoping to make use of bitcoin to pay for their rent or buy coffee, the decision adds complexity, since spending bitcoin is treated as a taxable type of barter. Those who spend bitcoins, and people who accept them as payment, will both need to notice the fair market value of the bitcoin on the date the transaction occurs. This will be used to calculate the spender’s capital gains or losses and the receiver’s basis for future gains or losses.
While the triggering event – the transaction – is simple to recognize, determining a specific bitcoin’s basis, or its holding period to be able to determine whether short-term or long-term capital gains tax rates apply, may prove challenging. For an investor, that might be a suitable hassle. But when you are deciding whether to purchase your latte with a bitcoin or perhaps pull five dollars out of your wallet, the simplicity of the latter will probably win the day. The IRS guidance simply makes clear what was already true: Bitcoin isn’t a brand new type of cash. Its benefits and drawbacks are different.
The IRS in addition has clarified several other points. If an employer pays a worker in virtual currency, that payment counts as wages for employment tax purposes. And if businesses make payments worth $600 or more to independent contractors using bitcoin, the businesses is going to be needed to file Forms 1099, in the same way they’d should they paid the contractors in cash..
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