Bitcoin Is Property Not Currency

[DoubleEntry]

Bitcoin Is Property Not Currency in Tax System, IRS Says

The U.S. government will treat Bitcoin as property for tax purposes, applying rules it uses to govern stocks and barter transactions, the Internal Revenue Service said in its first substantive ruling on the issue.

Today’s IRS guidance will provide certainty for investors, along with potential income-tax liability. Under the ruling, purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of income for the coffee shop.

The IRS, faced with a choice of treating Bitcoins like currency or property, chose property.

“The danger is the creation of an electronic black market, similar to the cash economy,” Joshua Blank, a tax law professor at New York University, said in a December interview. “That’s what the IRS wants to avoid.”

Bitcoin, the most popular digital currency, emerged from a 2008 paper written by a programmer or group of programmers under the name Satoshi Nakamoto. The Bitcoin network uses a public ledger to record transactions made under pseudonyms, a technological breakthrough that allows purchases and sales without using a trusted third party, such as Visa Inc. or Western Union Co.

Powerful computers that record the transactions and guard against double-spending the same currency generate new Bitcoins, a process referred to as mining. Mining has made some early Bitcoin adopters wealthy in dollar terms.
50-Fold Gain

Others bought into the currency in early 2013, before its price rose more than 50-fold to peak at $1,200 in early December. A Bitcoin was worth $577.11 at 11:38 a.m. New York time, according to the CoinDesk Bitcoin Price Index.

Under the IRS ruling, Bitcoin investors would be treated like stock investors. Bitcoins held for more than a year and then sold would pay the lower tax rates applicable to capital gains -- a maximum of 23.8 percent compared with the 43.4 percent top rate on property sold within a year of purchase.

For investors with losses, U.S. tax law allows taxpayers to subtract capital losses from any capital gains. They can also subtract up to $3,000 of capital losses a year from ordinary income.

As with stocks, Bitcoin dealers would be subject to different rules that wouldn’t allow for capital gains treatment.

Bitcoin miners would have to report their earnings as taxable income with a value equal to the worth on the day it was mined. If they mine as part of a business, they would have to pay payroll taxes as well.
Information Reporting

The IRS will require information reporting similar to how the tax agency receives notification of stock transactions and payments to independent contractors.

The ruling takes effect immediately and covers past and future transactions and tax returns. The IRS said in the notice that it may offer relief from penalties to people who engaged in transactions before today and can show “reasonable cause” for any underpayments or failure to file.

The ruling comes fewer than three months after National Taxpayer Advocate Nina Olson said the IRS should issue guidance to taxpayers on digital currency transactions.

“It is the government’s responsibility to inform the public about the rules they are required to follow,” Olson, who runs an independent office within IRS, wrote in her annual report to Congress in January. “The lack of clear answers to basic questions such as when and how taxpayers should report gains and losses on digital currency transactions probably encourages tax avoidance.”

Source: http://www.bloomberg.com/news/2014-03-25/bitcoin-is-property-not-currency-in-tax-system-irs-says.html

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[5thStreetResearch]

This is not good

[FeedbackLoop]

On the coffee cup buyer paying capital gains this is from the WSJ QA:

"Must payments made in bitcoin be reported to the IRS?

Yes, if they meet the requirements for information reporting on payments made in property. Typically, the threshold is payments of $600 or more."

Then again laws in general are not known for being self consistent. The whole thing is being discussed here:

https://bitcointalk.org/index.php?topic=530299.0

[jonald_fyookball]

If you made a ton of micro payments over say the course of a year when the bitcoin price was rising relative to usd, what are you supposed to do, go back and find the exact capital gains of each micropayment and total them? That's what they are implying and few people are going to do that.

[casinocoin]

This is not good

For Americans..

[marcus_of_augustus]

So Money Transmitter Licenses not needed because it is "Property" not a "Currency"?

[5thStreetResearch]

This is not good

For Americans..

not for bitcoin either

[Dissonance]

Any clarification on  long term capital gain tax applying to holdings over a year?  I belive that is taxed at a lower rate.

[FeedbackLoop]

This is not good

For Americans..

Yeah! Interestingly enough Danes seem to just have gotten clarification that they are due 0% capital gains tax on Bitcoin if I understood correctly. Also being discussed: 

https://bitcointalk.org/index.php?topic=530205.0

http://translate.google.com/translate?sl=da&tl=en&js=n&prev=_t&hl=en&ie=UTF-8&u=http%3A%2F%2Ffinans.tv2.dk%2Fnyheder%2Farticle.php%2Fid-73468284%3Aafg%25C3%25B8relse-bitcoingevinster-er-skattefrie.html

(Thanks for the sauce Dansker).

[DoubleEntry]

So Money Transmitter Licenses not needed because it is "Property" not a "Currency"?

IRS will provide guidance to regulators.

Any clarification on  long term capital gain tax applying to holdings over a year?  I belive that is taxed at a lower rate.

Bitcoins held for more than a year and then sold would pay the lower tax rates applicable to capital gains -- a maximum of 23.8 percent compared with the 43.4 percent top rate.

[Dissonance]

So Money Transmitter Licenses not needed because it is "Property" not a "Currency"?

IRS will provide guidance to regulators.

Any clarification on  long term capital gain tax applying to holdings over a year?  I belive that is taxed at a lower rate.

Bitcoins held for more than a year and then sold would pay the lower tax rates applicable to capital gains -- a maximum of 23.8 percent compared with the 43.4 percent top rate.

Thanks, I wonder how this could really be done.  There is no easy way for anyone to prove time of ownership.  I doubt its feasiable for the IRS to investigate this.I guess the IRS would just have to take someone's word on it .   Seems like an easily expoitable system.

[spazzdla]

This is not good

For Americans..

not for bitcoin either

I'd debate that.. IMO some whales were waiting for this, we'll see though I suppose.

[Dissonance]

This is not good

For Americans..

not for bitcoin either

I'd debate that.. IMO some whales were waiting for this, we'll see though I suppose.

I'd argue that its good for bitcoin.  It provides clarity and that will bring people into the ecosystem.  The guidance came in preety much as expected, I don't think it could have turned out any other way.

[hellscabane]

So Money Transmitter Licenses not needed because it is "Property" not a "Currency"?

IRS will provide guidance to regulators.

Any clarification on  long term capital gain tax applying to holdings over a year?  I belive that is taxed at a lower rate.

Bitcoins held for more than a year and then sold would pay the lower tax rates applicable to capital gains -- a maximum of 23.8 percent compared with the 43.4 percent top rate.

Thanks, I wonder how this could really be done.  Technicaly there is no way for anyone to prove time of ownership.  The guess the IRS would just have to take someone's word on it .   Seems like an easily expoitable system.

This is what I was wondering. There is no reasonable way to track this. I can see two ways of doing this: Attempting to track how many coins you had a year ago versus what you have today and taking that difference with the amount of coins you "mined/earned" during that fiscal year to determine how many one year old-coins you have, or assume you spend you always spend your newest coins. Gah, tons of paperwork that frankly isn't going to be worth it...

[Dissonance]

So Money Transmitter Licenses not needed because it is "Property" not a "Currency"?

IRS will provide guidance to regulators.

Any clarification on  long term capital gain tax applying to holdings over a year?  I belive that is taxed at a lower rate.

Bitcoins held for more than a year and then sold would pay the lower tax rates applicable to capital gains -- a maximum of 23.8 percent compared with the 43.4 percent top rate.

Thanks, I wonder how this could really be done.  Technicaly there is no way for anyone to prove time of ownership.  The guess the IRS would just have to take someone's word on it .   Seems like an easily expoitable system.

This is what I was wondering. There is no reasonable way to track this. I can see two ways of doing this: Attempting to track how many coins you had a year ago versus what you have today and taking that difference with the amount of coins you "mined/earned" during that fiscal year to determine how many one year old-coins you have, or assume you spend you always spend your newest coins. Gah, tons of paperwork that frankly isn't going to be worth it...

How does this work for stocks.  If I own 100 Shares of Stock XYZ for 364 days and then purchase 10 more shares and then wait one day then sell 10 shares.  Would that sell be at taxed at long term or short term gains ?

[jbreher]

There is no reasonable way to track this.

Nonsense. All transactions ore visible on the blockchain. Just choose between LIFO and FIFO accounting models, then get to finding the dates of each of your transactions.

[Dissonance]

There is no reasonable way to track this.

Nonsense. All transactions ore visible on the blockchain. Just choose between LIFO and FIFO accounting models, then get to finding the dates of each of your transactions.

How does the IRS establish ownership of the Wallets ?  If I transfer BTC from one Wallet to another (both mine) does that reset the ownership clock?  How about online wallets and third party providers that pool their btc?

[jonald_fyookball]

Obviously IRS was mulling it over for a while. 

What's the downside to the IRS or us govt to saying it's not currency?

[Dissonance]

There is no reasonable way to track this.

Nonsense. All transactions ore visible on the blockchain. Just choose between LIFO and FIFO accounting models, then get to finding the dates of each of your transactions.

How does the IRS establish ownership of the Wallets ?  If I transfer BTC from one Wallet to another (both mine) does that reset the ownership clock?  How about online wallets and third party providers that pool their btc?

No, it does not reset the ownership clock if you transfer to yourself. Would that happen with money in bank accounts?

This isn't rocket surgery.

With third party services, you should obtain proper documentation from them.

Personally I just need to check my coinbase account so there is no issues with me , my concern is around that fact that this system is dependant entirely on the honesty of the tax payer.

[jbreher]

my concern is around that fact that this system is dependant entirely on the honesty of the tax payer.

This is the system we have in the USA. Responsibility for disclosure, filing, and payment is the responsibility of the taxpayer.

If you are audited, however, you best be able to show records of the transactions. I would assume the IRS would consider proof of these on the blockchain as definitive.