IRS: Bitcoins Are Property

The IRS finally released guidance on Bitcoins and other virtual currency today. The IRS’s notice states that Bitcoins should be treated as property. What does this mean?

1. Bitcoins held as investments are generally treated under capital gain rules. If you buy a bitcoin today and sell it in less than a year and a day, it will be a short-term capital gain or loss. Hold it longer, and it’s a long-term gain or loss. (There are exceptions to the capital gain treatment for other situations of Bitcoin use, though.)

2. Every time you spend a Bitcoin (or any part thereof) you have a gain or loss of income based on the change in fair market value of the Bitcoin. If you use Bitcoins regularly, you have lots of paperwork (or spreadsheet work) in your future.

3. If you mine a Bitcoin (for those not familiar with this term, it’s basically the creation of a Bitcoin), you have increased your income. It’s reportable; Congress hasn’t exempted Bitcoin mining from income.

4. Similarly, if you pay people in Bitcoins, it’s reportable as salary (or nonemployee compensation or whatever else). You need to use a “reasonable consistent method” for determining the valuation as you will need to file a W-2 or 1099 based on US dollars. There isn’t any exception for Bitcoins in information reporting rules.

For those who are active in Bitcoins, I strongly suggest you read the IRS notice. It’s fairly straightforward (and there’s plenty more I haven’t covered). Do note this is not the last word on Bitcoin regulations, though. The IRS is looking for comments on the notice.

The Treasury Department and the IRS recognize that there may be other questions regarding the tax consequences of virtual currency not addressed in this notice that warrant consideration. Therefore, the Treasury Department and the IRS request comments from the public regarding other types or aspects of virtual currency transactions that should be addressed in future guidance. Comments should be addressed to:

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2014-21)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Alternatively, taxpayers may submit comment electronically via e-mail to the following address: Notice.Comments@irscounsel.treas.gov. Taxpayers should include “Notice 2014-21” in the subject line. All comments submitted by the public will be available for public inspection and copying in their entirety.

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