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CNNMoney: New IRS Rule Might Kill Bitcoin

By Michael Kling   |   Monday, 31 Mar 2014 12:52 PM

A new IRS rule that treats bitcoins as property for tax purposes will cause major difficulties for its users and may even kill the digital currency, experts fear.

Bitcoin users must treat transactions — including purchases of merchandise with bitcoins — as taxable events, just like sales of stocks or mutual funds, according to the IRS.

That means they'll have to keep records on the value of the bitcoins they trade and purchase merchandise with. The wildly swinging value of bitcoins and tedious chore keeping records on purchases creates a huge headache for bitcoin fans.

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"That would obviously create an accounting nightmare for taxpayers and may cause taxpayers to avoid using virtual currency," Jeffrey Hochberg, a New York tax attorney, told CNNMoney.

If you buy a $500 bitcoin that doubles in value to $1,000, and then use it to purchase something for $1,000, you have a $500 gain to report. Tax reporting becomes increasingly complex if you make multiple transactions with the same bitcoin and have multiple bitcoins with different values.

Some experts say most taxpayers can simply ignore the rule. Bitcoin purchases are difficult to track as it is, and the underfunded IRS lacks the resources to audit small-time users. The IRS will be mainly interested in big players — businesses and large traders considering tax evasion.

New software applications could solve the problem.

"This is a space where the killer bitcoin app could emerge," Marc Nickel, a Silicon Valley attorney, told CNNMoney. "Something that tracks your basis [bitcoin value] and records gains and losses against market value, daily."

The problem is that entrepreneurs and the app developers need time to develop an app. That's why Congress should delay the new rule to give developers time to devise new apps or reverse the IRS decision, bitcoin supporters told The Christian Science Monitor.

Some bitcoin supporters believe the IRS decision gives the digital currency, known for purchases of illicit products, legitimacy.

"Now that the IRS has made a public statement about the currency, this takes the uncertainty out of the marketplace," Erick Watson, chief operating officer of New Path Mining, a bitcoin mining firm in Seattle, Wash., told The Christian Science Monitor.

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A new IRS rule that treats bitcoins as property for tax purposes will cause major difficulties for its users and may even kill the digital currency, experts fear.
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