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New IRS Virtual Currency Rules Help Bitcoin's Legitimacy

Monday, 31 March 2014 01:53 PM Current | Bio | Archive

Virtual currencies like bitcoin suffer from many legal unknowns, but tax is no longer one of them.

Settling the classification of some type of property or transaction for tax purposes has the curious consequence of giving a semblance of legitimacy to an otherwise questionable situation.

While perceptions of bitcoins —what they are and how the work — still linger, at least we now know that whatever they are the IRS wants to tax them.

Guidance issued by the IRS last week says that virtual currencies — like bitcoins — are to be viewed for taxation purposes as property and not a currency.

The tax rules as to the treatment of property as opposed to currencies are quite different. While not everybody will be happy with this decision, it has the benefit of giving some certainty for those virtual currency buyers who have placed a lot of money in their beliefs.

This did not happen in a vacuum. Tax practitioners have been requesting guidance ever since their first client got involved in these things. Everyone knew there would be tax effects, but nobody knew for sure what they would be. Even the National Taxpayer Advocate made reference to this issue in her Annual Report to Congress about three months ago.

For bitcoin owners who lost millions when Mt. Gox went under, at least they can file their federal income tax return with some confidence that they are in compliance with the IRS view of the issues.

There are still plenty of tax problems. The assumption is that the value of bitcoins will be the U.S. dollar. But this may not be really applicable to a U.S. person outside the United States whose functional currency is something other than U.S. dollars.

After all is said and done, one of the major reasons people use virtual currencies is because they don't trust the value of the dollar. Let's face it, the U.S. dollar is being manipulated and distorted by the government, while bitcoins are valued by the free market.

I noticed recently that the Germans and the Chinese have created a renminbi clearing solution in Frankfurt. Just a few days earlier, the U.K. government entered into a memorandum of understanding on renminbi clearing and settlement between the Bank of England and the Bank of China. This allows the Bundesbank and the Bank of England to become offshore centers for Chinese currency.

As a result, the U.S. dollar will become less relied upon for global trade between major trading nations.

So, it seems the view of bitcoin and other virtual currency buyers in recognizing the need for alternative currencies is not all that farfetched.

The actions of the Federal Reserve in so-called “quantitative easing” are rapidly diminishing the value of the U.S. dollar, and other countries, their businesses and investors, are reacting to this by taking actions to avoid the valuation reliability risk of using the U.S. dollar.

The IRS guidance provides a FAQ sheet, which is of immense help in understanding how the federal income tax rules will apply.

For U.S. tax compliance purposes, a payment in bitcoin or any virtual currency is subject to reporting just like any other payment by way of property.

Clearing up the tax status of bitcoin and other virtual currencies, at least from the U.S. perspective, should be helpful in legitimizing and expanding their use on a global basis.

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Virtual currencies like bitcoin suffer from many legal unknowns, but tax is no longer one of them.
Monday, 31 March 2014 01:53 PM
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