Bitcoin was previously something like Schrodinger’s currency. Without regulatory observers, it could claim to be money and property at the same time.
Now the Internal Revenue Service has opened the box, and the virtual currency’s condition is initiated – at the very least for federal tax purposes.
The IRS recently issued guidance on how it’ll treat bitcoin, and any other stateless electronic competitor. The short answer: as property, not currency. Bitcoin, along with other virtual currencies that can be exchanged for legal tender, will now be treated typically as a capital asset, and in several situations as inventory. Bitcoin holders who’re not dealers will undoubtedly 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, in the same way other miners do when extracting more traditional resources.
Though this decision is unlikely to cause much turbulence, it’s worth noting. Given that the IRS has made a phone, investors and bitcoin enthusiasts can progress with an even more accurate understanding of what they’re (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 do believe the IRS is correct in determining that bitcoin is not 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 worthiness of almost all currencies changes from week to week or year to year in accordance with any particular benchmark, whether oahu is the dollar or a barrel of oil. But an integral feature of money is always to serve as a store of value. The worth of the cash 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 really a spot to park your idle, spendable cash. Further, to my knowledge, no mainstream financial institution will pay interest on bitcoin deposits in the form of more bitcoins. Any return on a bitcoin holding comes solely from a change in the bitcoin’s value.
Perhaps the IRS’decision can help or hurt current bitcoin holders depends on why they wanted bitcoins in the very first place. For anyone hoping to profit directly from bitcoin’s fluctuations in value, this really is good news, as the rules for capital gains and losses are relatively favorable to taxpayers. This characterization also upholds just how some high-profile bitcoin enthusiasts, like the Winklevoss twins, have reported their earnings in the lack of clear guidance. (While the newest treatment of bitcoin is applicable to past years, penalty relief may be available to taxpayers who are able to demonstrate reasonable reason for their positions.)
For anyone hoping to utilize bitcoin to cover their rent or buy coffee, your decision adds complexity, since spending bitcoin is treated as a taxable form of barter. People who spend bitcoins, and those that accept them as payment, will both need to note the fair market value of the bitcoin on the date the transaction occurs. This is used to calculate the spender’s capital gains or losses and the receiver’s basis for future gains or losses.
As the triggering event – the transaction – is easy to identify, determining a particular bitcoin’s basis, or its holding period in order to determine whether short-term or long-term capital gains tax rates apply, may prove challenging. For an investor, that might be an acceptable hassle. But when you are deciding whether to get your latte with a bitcoin or just pull five dollars from the wallet, the simplicity of the latter probably will win the day. The IRS guidance simply makes clear what had been true: Bitcoin isn’t a fresh form of cash. Its benefits and drawbacks are different.
The IRS has additionally clarified some 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 even more to independent contractors using bitcoin, the businesses will undoubtedly be needed to file Forms 1099, in the same way they’d should they paid the contractors in cash.
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