How Is Bitcoin Taxed? The IRS Doesn’t Know

Absent any guidelines, investors in the virtual currency will have to muddle through tax season.

National Journal
Catherine Hollander
Jan. 26, 2014, 10:05 a.m.

How do you tax bit­coins? Ap­par­ently, not even the IRS knows.

In­ter­net for­ums like Red­dit and bit­cointalk.org are ex­plod­ing with ques­tions about how users of the in­creas­ingly pop­u­lar vir­tu­al cur­rency should fill out their tax forms this year.

“Some of us have sold some for fi­at [money]. Some of us want to pay taxes on that but don’t know how,” wrote one user.

“If they want us to pay our taxes they should tell us how so I can get an ac­count­ant!” said an­oth­er.

The Tax­pay­er Ad­voc­ate Ser­vice, which is an in­de­pend­ent of­fice with­in the IRS, poin­ted to those types of In­ter­net com­ments and the ad­vice they garnered from pur­por­ted ex­perts in a 2013 re­port to Con­gress. “Some of this spec­u­la­tion is in­cor­rect, in­com­plete, or mis­lead­ing,” the re­port said. “It is the gov­ern­ment’s re­spons­ib­il­ity to in­form tax­pay­ers about the rules they are re­quired to fol­low.”

The heart of the is­sue is wheth­er the IRS will view bit­coins as a cur­rency or a com­mod­ity.

But the gov­ern­ment re­mains mum: “The IRS is aware of the po­ten­tial tax-com­pli­ance risks posed by vir­tu­al cur­ren­cies,” the agency said in an emailed state­ment. “The IRS con­tin­ues to study vir­tu­al cur­ren­cies and in­tends to provide some guid­ance on the tax con­sequences of vir­tu­al-cur­rency trans­ac­tions.”

They’d bet­ter study quickly. Bit­coin us­age in­creased by more than 75 per­cent between Ju­ly and Decem­ber 2013 as the mar­ket value of bit­coins in cir­cu­la­tion climbed to $12.6 bil­lion from $1.1 bil­lion. The climb­ing price has at­trac­ted in­vestors and led busi­nesses in the United States, in­clud­ing on­line dis­count re­tail­er Over­stock.com, to say they will ac­cept the di­git­al pay­ment.

Bit­coin sup­port­ers don’t un­der­stand why the IRS is wait­ing to weigh in. “It shouldn’t be as ma­gic­al as they’re mak­ing it,” said Daniel Mor­ris, seni­or part­ner at Mor­ris + D’An­gelo, a Sil­ic­on Val­ley-based CPA firm. He said bit­coins should be treated like any oth­er non­dol­lar de­nom­in­ated trans­ac­tion in tax fil­ings.

For now, so long as bit­coin users make some at­tempt to pay the gov­ern­ment what they think they owe, they prob­ably — maybe — won’t get in trouble.

“If you made a best ef­fort, ad­ded and doc­u­mented your pro­cess, that if the IRS were to ques­tion it, it most likely would be al­low­able,” said Janet Lee Kroch­man, a CPA in South­ern Cali­for­nia who bought her 21- and 22-year-old sons a bit­coin each for Christ­mas this year to fa­mil­i­ar­ize them with the world of in­vest­ing.

She said she will re­com­mend that they re­port any gains as cap­it­al on their tax re­turns.

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