Business Finance

IRS will now tax Bitcoins as property: is this good or bad?


(Business Finance) Bitcoin has gone so mainstream that the IRS is now regulating it and changing taxes associated with the use of the virtual currency, but it’s not all good news.


Bitcoing to be taxed by the IRS

The U.S. Internal Revenue Service has announced that Bitcoins will be taxed as property. This means that people making a profit on their Bitcoin investment will pay lower capital gains taxes instead of being taxed at a higher rate for foreign currency gains. This categorization change will also mean that the virtual currency will become more difficult to use due to more extensive record keeping required for daily transactions.

“For federal tax purposes, virtual currency is treated as property,” the IRS noted in a statement. “General tax principles applicable to property transactions apply to transactions using virtual currency.”

In other words, Bitcoin investors are akin to stock investors, not foreign currency market speculators. Just like when you sell off your stocks, you pay the capital gains tax. Again, this is a win for people who have invested U.S. dollars into Bitcoin as the tax rate is slashed in half, which people collecting Bitcoins will appreciate.

Win for investors, loss for daily users and retailers

People who use Bitcoin for daily transactions are in for some difficulties. Bloomberg explains, “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.”

Further, the Wall Street Journal notes that “[U]se of Bitcoin in a retail transaction typically would be a taxable ‘event’ for many buyers, requiring them to figure out the gain they had made on the virtual currency—and eventually pay tax on it. Tax experts say that could come as a surprise to some investors. It also could put a damper on use of Bitcoin for many retail purchases.”

Bitcoin users will now be required to report to the IRS every single individual instance of common payments like wages, premiums, rents, and so forth, if the transaction exceeds $600. This complicates the anonymity many seek out when using the virtual currency.

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