IRS says bitcoin will be taxed like property, not currency

IRS says bitcoin will be taxed like property, not currency

Summary: America's taxation authority, the Internal Revenue Service, says that bitcoin is not legal tender, and will be treated the same as a commodity for investors.

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Virtual currencies like bitcoin will be taxed like property — not currency, the Internal Revenue Service says.

The IRS says bitcoin is not legal tender. You can't use it to pay your taxes. However, if you receive wages in bitcoin, you have to pay taxes on it just like you would if you got paid in dollars. Or if you got paid in chickens.

The IRS issued a series of 16 questions and answers on Tuesday to clarify the tax treatment of virtual currencies like bitcoin. In general, the IRS says, it will apply the same rules that govern other barter transactions.

If you receive wages in bitcoin, they would be taxed at their fair market value at the time you were paid, the IRS said. If you use bitcoins to pay for goods or services, the vendor must report the income, using the fair market value of the bitcoins at the time of the transaction.

For investors, bitcoins will be treated like other commodities, the IRS said. If they increase in value, you have to pay capital gains taxes after you sell them. If they lose value, you can recognise a capital loss.

Created in 2009, bitcoin is an online currency that allows people to make one-to-one transactions, buy goods and services and exchange money across borders without involving banks or other third parties. Bitcoins have become popular with libertarians, tech enthusiasts and speculators.

Regulators worry about criminals using them to avoid detection.

In February, one of the largest bitcoin exchanges, based in Tokyo, filed for bankruptcy, adding to mistrust of the currency. Supporters say problems at the exchange were isolated.

Topics: Emerging Tech, Government US

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  • Can the IRS enforce this?

    Does the IRS stand a chance of tracking Bitcoin exchanges? Especially if folks trade in other country's and that country doesn't think like the IRS? I don't know how you control something like this. I understand the "paid in chickens" similarity but the chickens have to physically be exchanged in a country of residence and if that's the US, the IRS has the potential to track that exchange. How can they track Bitcoins being deposited on your behalf in a foreign exchange? Moreover, how is this any different than an international company that holds profits off-shore to avoid taxes (i.e. Apple, Microsoft, etc.)
    robradina@...
    • it's a rule

      Paid in cash, you can deny you received it. IRS can't track it. Paid in bitcoin, you can deny you received it. IRS can't track it. Quite similar. No great revelation here.
      The rules are the rules.
      Receive some checks (on the books, especially payroll, pre-taxed and tracked 15 ways), receive some cash, receive some bitcoin. Follow the rules, or don't follow them. Write down all your income, or cleverly leave some out. It's the same decision it ever was.
      I'm not sure there is any news in this article. Payments received in bitcoin are treated like payments of any other commodity, which means count it at its "fair market value" as you receive it. How does that differ from payments accepted in any real foreign currency?? If there's no difference, which would be logical, then discuss it that way. If there is a difference, that is news, and it obliges them to say how commodity treatment differs from currency treatment.
      It's no surprise you can't pay IRS with bitcoin. You never could pay them with Rubles. You never could pay them with chickens. Whether you receive dollars, rubles, chickens, or bitcoin, you calculate your income in dollars; from that you calculate your tax in dollars, and finally you pay in dollars. If you only have rubles, chickens, or bitcoin, you'll have to exchange some for dollars first.
      dv5678
  • I'm wondering about the "fair market value" requirement

    Clearly one will need to pay attention to exchange rates to properly report Bitcoin income (do exchanges post past rates?), but I'm guessing that this is a legal consequence of it being treated as property.

    More work for tax preparers.
    John L. Ries
  • Capital gains tax on Bitcoin

    This might be one big reason why "Bitcoin Jesus" is in such a tear to revoke his U.S. citizenship:

    http://www.salon.com/2014/03/09/the_ballad_of_bitcoin_jesus_the_tech_millionaire_evangelist_who_fears_for_his_life/
    Rabid Howler Monkey
    • Capitol Gains taxes? My guess why he ran.

      "uncertain and littered with likely chances for wrongful imprisonment or assassination"

      OKkkkkkkkk.........
      William.Farrel
      • William.Farrel: "My guess why he ran"

        I didn't write about his being on the run, currently somewhere in the Caribbean. Instead, I wrote about his efforts to revoke his U.S. citizenship which the article also discusses.

        The article does, in fact, note that he has been in contact with the U.S. embassy in Tokyo, Japan, for the purpose of renouncing his U.S. citizenship.

        In addition, the article states that his *first* investment in Bitcoin was for $25,000 U.S. in 2011 at approximately $2 U.S. per Bitcoin. How many more investments did he make in Bitcoin? And at what price? As a U.S. citizen, he will own Uncle Sam a huge amount of money for capital gains tax on Bitcoin. That was my point.
        Rabid Howler Monkey
        • I'm there.

          I understand, and agree with you that he ran so as to not have to pay taxes on his wealth he earned, but I'm not sure as to why he fears "wrongful imprisonment or assassination".

          I was just commenting on the rest of the article, that's all.
          William.Farrel
          • Because...

            " I'm not sure as to why he fears "wrongful imprisonment or assassination".

            You've got to understand the Libertarian mindset. These guys' favorite phrase is: "...enforced at the point of a gun."

            Any law that they don't like (i.e. taxation) is, to them "enforced at the point of a gun."

            Does that mean that the g'ummint is going to shoot you for not paying your taxes? Of course not. But the way a Libertarian sees it:

            1.- Taxes are un-constitutional/immoral/illegitimate/illegal etc, so I'm not going to pay them.
            2.- The government is going to fine me.
            3.- I'm not going to pay the fine, because it's illegitimate (see item #1 above)
            4.- They're going to send agents to server me with a supoena.
            5.- I'm not going to answer the door (see item #1 above)
            6.- They're going to send agents with warrants.
            7.- As soon as they knock down my door they are trespassing (because of #1 above) so I have a right to shoot them to protect my property.
            8.- After I've killed the first batch of agents (Libertarians have very unrealistic self-appraisals of their combat skills) they're going to send hundreds of agents to surround my home.
            9.- A shootout will ensue, during which I'll probably be killed, which, because of #1 above, is basically nothing more than a government ordered assassination.
            10.- Ergo, taxes are enforced at the point of a gun.
            dsf3g
          • That's probably an exaggeration...

            ...as to the average libertarian, but there are still plenty of people who think that way.
            John L. Ries
  • The IRS can do "income reconstruction".

    As noted, "how can they enforce it?" Well, as a practical matter they can't. It's like running a mainly cash business and not keeping records.

    As a practical matter, folks who are making a lot of money either way tend to brag. Sooner or later someone gets ticked off and reports them. One reason is that the IRS does offer rewards. (I think it's something like up to 10%, but I'm really not sure about the amount and it probably changes.)

    If the person or business (could be a partnership) doesn't keep good records, the IRS can do an "income reconstruction". They know from economics studies they do that folks in a certain income bracket spend approximately X% on housing, Y% on food, Z% on vehicles, etc. So if the guy is paying $1,200 a month on his home mortgage, $600 on his vehicle lease and insurance, $1,000 a month for tuition at his kid's school, etc., he's obviously not bringing in $1,800 a month gross. It then becomes the guy's burden to show he does NOT have the reconstructed amount.
    Rick_R
    • The other thing is....

      ...individuals and organizations with criminal reputations tend to get a lot of attention from the IRS. It hasn't been forgotten that in the end, Al Capone wasn't put away for murder or bootlegging, but for income tax evasion.

      So part of the reason for this announcement may be the reported use of Bitcoin by smugglers and money launderers (among others).
      John L. Ries
  • Real?

    Is the hidden, unremarked on story here that the IRS has permanently put a dagger in the heart of the "it's not real" argument? If virtual currency isn't real property, why can we now "officially" claim a capitol loss if it's value goes down? Obviously, if it isn't real, then neither are US dollars.

    BTW, if I do speculative trading in foreign currencies such as the pound and euro, and I must declare gains and losses when I convert those currencies back to dollars, does that mean the euro isn't a currency, but rather property? After all, there is an official exchange rate, and it is always changing. Furthermore, if I am both shrewd and lucky, I can pile up a bunch of dollars and never pay taxes if I do NOT have to treat these foreign currencies as property, can I not?!
    ClearCreek