Investors may not want bitcoin to be a real currencyTreating the virtual currency like a dollar would raise taxes on profits
By Jonnelle Marte, MarketWatch
Tax pros generally agree any income achieved by selling bitcoins must be taxed. “Bitcoin is subject to income and capital gains taxes like anything else,” says Stephen Pair, co-founder and chief technology officer of BitPay, a payment services provider that specializes in virtual currencies. The exact way they are handled, however, could have very different tax implications.
In Norway, for example, the tax authority there declared Monday that bitcoins aren’t a real currency but that they would be taxed as an asset and charged capital gains tax. No such clarity has been offered in the U.S., where lawmakers are trying to figure out the best way to track bitcoins, but some tax experts are saying that when such guidance is finally issued here, an outcome similar to the ruling in Norway—where the virtual currency won’t be treated as a currency at all—could be better for bitcoin users. That’s because if bitcoins were to be recognized as a currency, users would be limited by tax rules requiring any gains generated by holding physical currency to be taxed as ordinary income, says Robert A. Green, an accountant in New York, whose firm GreenTraderTax, specializes in advising traders. If bitcoins were treated as a real currency, gains would have to be taxed at regular income tax rates, which could get as high as 39.6% for the wealthiest bitcoin users, he says. In contrast, if bitcoins are treated as an asset—similar to the way they will be treated in Norway—they could potentially be taxed at the much lower long-term capital gains rate of 20% for investors in the top tax bracket, says Green. (That is, if investors hold their bitcoins for more than 12 months before selling them. Any bitcoins sold in less than 12 months would be taxed as ordinary income in that scenario.)
Foreign exchange traders are able to work around the higher taxes when it comes to legitimate currencies by buying and selling foreign currency contracts, which allow them to bet on the direction of a currency, without holding the physical currency, says Green. If bitcoins were to be recognized as a legitimate currency, bitcoin investors would have no such way to opt out of the requirements that gains be treated as ordinary income since such contracts don’t currently exist for the virtual currency. Of course, if bitcoins were legitimized, banks could also adapt by creating contracts to allow investors to make bets on the currency without actually having to buy bitcoins, says Green. Some investment banks are already trying to create a marketplace that would make it easier for bitcoins to be converted into other currencies, he says.
While investors wait for official word on exactly how bitcoins should be treated, some bitcoin holders might want to report them as a capital asset, says Bob Meighan, an accountant with TurboTax. In that scenario, income generated from selling them would be treated as either long-term or short-term gains depending on how long investors held the coins. The downside to the approach: losses would be limited to $3,000 a year and other losses may have to be carried over to future tax years. Of course, “the loss question has generally not come often since bitcoins have been appreciating,” says Meighan.
http://www.marketwatch.com/story/investors-may-not-want-bitcoin-to-be-a-real-currency-2013-12-17?siteid=rss&rss=1
