Bitcoin was previously something such as Schrodinger’s currency. Without regulatory observers, it might claim to be money and property at the exact same time.
Now the Internal Revenue Service has opened the box, and the virtual currency’s condition is initiated – at least for federal tax purposes.
The IRS recently issued guidance on how it’ll treat bitcoin, and every other stateless electronic competitor. The short answer: as property, not currency. Bitcoin, as well as other virtual currencies that may be exchanged for legal tender, will now be treated in most cases as a capital asset, and in a few situations as inventory. Bitcoin holders that are not dealers is going to be at the mercy of capital gains tax on increases in value. Bitcoin “miners,” who unlock the currency’s algorithms, will need to report their finds as income, just like other miners do when extracting more traditional resources.
Though this decision is unlikely to cause much turbulence, it is worth noting. Given that the IRS has made a call, investors and bitcoin enthusiasts can move ahead with a far more accurate knowledge of what they are (virtually) holding. A bitcoin holder who would like to adhere to the tax law, as opposed to evade it, now knows how to accomplish so.
I think the IRS is correct in determining that bitcoin isn’t money. Bitcoin, and other virtual currencies like it, is too unstable in value because of it to realistically be called a form of currency bitcoin mixer. 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 relative to any particular benchmark, whether it’s the dollar or a barrel of oil. But an integral feature of money is always to serve as a shop of value. The worth of the amount of money itself should not change drastically from everyday or hour to hour.
Bitcoin utterly fails this test. Purchasing a bitcoin is really a speculative investment. It is not a destination for a park your idle, spendable cash. Further, to my knowledge, no mainstream financial institution will probably pay interest on bitcoin deposits in the form of more bitcoins. Any return on a bitcoin holding comes solely from the change in the bitcoin’s value.
Whether the IRS’decision may help or hurt current bitcoin holders depends upon why they wanted bitcoins in the initial place. For those hoping to profit directly from bitcoin’s fluctuations in value, this is good news, as the principles 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 cause for their positions.)
For those hoping to utilize bitcoin to pay their rent or buy coffee, your choice adds complexity, since spending bitcoin is treated as a taxable kind of barter. Those that spend bitcoins, and those that 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.
Whilst the triggering event – the transaction – is simple to recognize, determining a certain 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 could be an acceptable hassle. But if you are deciding whether to purchase your latte with a bitcoin or perhaps pull five dollars from your wallet, the simplicity of the latter is likely to win the day. The IRS guidance simply makes clear what was already true: Bitcoin isn’t a brand new kind of cash. Its benefits and drawbacks are different.
The IRS in addition has clarified various 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 maybe more to independent contractors using bitcoin, the businesses is going to be required to file Forms 1099, just like they would should they paid the contractors in cash.
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