IRS Says That Bitcoin Must Be Classified As Property, Not Currency

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Bitcoin has been a hot topic in the news over the past year. Some have been welcoming to it and many retailers like Overstock and Tigerdirect let people pay with the virtual currency while others just aren’t sure what to do about – governments in particular.

The Russian government has declared Bitcoin transactions illegal, China has banned it’s banks from handling Bitcoin trades, and Japan declared that it is not a currency. (BBC)

The U.S. government has come out with their first ruling on the issue with the Internal Revenue Service announcing that Bitcoin will be classified as property for tax purposes and not a currency.

Having this clarity is going to help with people who have invested in Bitcoin to know the tax-liabilities they are responsible for, but is most likely going to reduce the amount of potential daily transactions.

For example, purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of gross income for the coffee shop. (Bloomberg)

It’s going to be a challenge for people who want to use Bitcoin on a daily basis when they need to factor in capital gains for small purchases like a cup of coffee.

According to Forbes, this is what Bitcoin users will be responsible for:

  • Wages paid to employees using virtual currency are taxable, must be reported on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
  • Payments using virtual currency made to independent contractors are taxable and payers must issue Form 1099.
  • Gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in your hands.
  • A payment made using virtual currency is subject to Form 1099 reporting just like any other payment made in property.
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Joey Bonura

Joey Bonura is from Louisville, Kentucky and moved to Panama more than two years ago to finish his degree in International Business. He enjoyed the hot tropical weather and the lifestyle on offer in Panama City so much that he decided to make this his permanent residence.