Bitcoin is property, not currency, IRS says
The U.S. government will treat bitcoin as property for tax purposes, applying rules it uses to govern stocks and barter transactions, the Internal Revenue Service said in its first substantive ruling on the issue.
Tuesday’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.
The IRS, faced with a choice of treating bitcoins like currency or property, chose property.
“The danger is the creation of an electronic black market, similar to the cash economy,” Joshua Blank, a tax law professor at New York University, said in December. “That’s what the IRS wants to avoid.”
Bitcoin, the most popular digital currency, emerged from a 2008 paper written by a programmer or group of programmers under the name Satoshi Nakamoto. The bitcoin network uses a public ledger to record transactions made under pseudonyms, a technological breakthrough that allows purchases and sales without using a third party, such as Visa Inc. or Western Union.
Powerful computers that record the transactions and guard against double-spending the same currency generate new bitcoins, a process referred to as mining. Mining has made some early bitcoin adopters wealthy in dollar terms.
Others bought into the currency in early 2013, before its price rose more than 50-fold to peak at $1,200 in early December. A bitcoin was worth $577.11 Tuesday morning, according to the CoinDesk Bitcoin Price Index.
Under the IRS ruling, bitcoin investors will now be treated like stock investors. Bitcoins held for more than a year and then sold will be sub- ject to the lower tax rates applicable to capital gains — a maximum of 23.8 per cent compared with the 43.4 per cent top rate on property sold within a year of purchase.
As with stocks, Bitcoin dealers will be subject to different rules that wouldn’t allow for capital gains treatment.
Bitcoin miners will have to report 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 will have to pay payroll taxes as well.