Tuesday, March 25, 2014

IRS issues rules on tax treatment for Bitcoin

This Bloomberg article covers the new IRS ruling on tax treatment for Bitcoin. For most people Bitcoin would be taxed similar to someone buying or selling stock. Bitcoin dealers have to report Bitcoins earned at their value on the date earned though as income. Retailers also have to report Bitcoins as income at their value on the date a customer makes a purchase.

Here a a few quotes from the article, then my added comments.

"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.

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."

"The IRS will require information reporting similar to how the tax agency receives notification of stock transactions and payments to independent contractors."

my added comments:

There is nothing surprising to me in this IRS ruling. I would have expected them to treat Bitcoin like other property bought and sold for a gain or loss. It does mean that retailers who accept Bitcoin will bear risk immediately for a drop in the price of Bitcoin from a tax standpoint. In the example used above, a coffee shop that sells a cup of coffee for $2 in Bitcoins owes taxes on $2 income even if the Bitcoin received drops in value the next day.

This makes Bitcoin very different from a currency. If the coffee shop sells a cup of coffee for $2 in US dollars, the dollars will have essentially the same value for at least some period of time. Inflation impacts the dollars, but at a less volatile pace than could happen with Bitcoin.

In addition, those who are attracted to Bitcoin with the idea that they will not disclose transactions to the government will clearly be violating tax law now. Every Bitcoin acquired or used (bought or sold) is required to be reported. Records for the price on the date of acquisition and the date used would have to be maintained (like you would for buying and selling stock).

This also makes it awkward for trying to use it like a currency. Imagine the reporting burden if Bitcoins were actually used like dollars. It would be like having to keep track of the date you acquired and used every dollar you spend each month.

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