It wouldn"t be tax season without the IRS declaring sweeping changes that affect the 2013 taxes that many people have already submitted. In a Tuesday announcement, the agency declared that the virtual currency knows as bitcoin is considered taxable property. Bitcoin owners, traders and miners must pay property tax on their bitcoin, and must maintain records of their bitcoin transactions. And yes, there are penalties for failing to comply with this law that the IRS failed to inform you about.
You"ve heard of bitcoin – the digital currency that has caught on in the last year and can be used in any country. It is not honored as currency by any country on earth, but bitcoin transaction fees are lower than those of credit cards. Bitcoin has become a popular way to pay for illegal activities, but has a small problem when occasionally a half a billion dollars disappears.
Now bitcoin owners and dealers have another problem because the IRS will tax bitcoin as property. The rule affects not only your 2013 taxes, but all prior years in which you may have owned or used bitcoin.
"The Internal Revenue Service said Tuesday that it will treat bitcoin and other virtual currencies like property, not currency, giving a potential boost to investors but imposing extensive record-keeping rules — and significant taxes — on its use," write the Wall Street Journal"s John McKinnon and Ryan Tracy.
The full set of IRS rules on bitcoin taxation was also made available by the Journal.
This news may seem like a downer to anyone who trades in bitcoin, but the IRS’s ruling is actually quite favorable to the bitcoin community. The IRS has ruled that bitcoin is property -- not income -- and so the tax rate is substantially lower. Income can be taxed as much as 40 percent, whereas property like stocks, bonds or investments are taxed at about half that rate. Because the system is set up to benefit the rich, so they can exploit tax favorable dodges while complaining about how terribly persecuted they are by over taxation.
The rules work a little differently for bitcoin investors and people who get paid in bitcoin. If you get paid in bitcoin, you will be taxed on the "fair market value" of your bitcoin. Is "fair market value" measured on a day when a single bitcoin is worth more than $1,000, or during a crash period when a single bitcoin is not even worth $160? The IRS doesn"t really say.
Investors, meanwhile, are only taxed on the gains when the value of their bitcoin increases.
The rules are imperfect, but I"m inclined to forgive the IRS because bitcoin is new and this is unchartered territory. The rules will surely be modified over time. But the move shows that the IRS is trying to understand and monetize shifting technologies, and discouraging the use of bitcoin for tax evasion purposes.