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
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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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