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IRS classifies Bitcoin as property for tax filing

The Internal Revenue Service issued yesterday its statement that Bitcoin will be considered property for tax purposes and the rules that apply to stocks and barter transactions will apply to govern Bitcoin. This was the first substantive ruling on the virtual currency as it is called by the IRS and it can be found on the IRS site.

Bitcoin ATM Placed In Boston Commuter Hub
Bitcoin ATM Placed In Boston Commuter HubPhoto by Darren McCollester/Getty Images

This raises the issue of how to classify the sale of Bitcoin when you purchase a product, service or simple any item. If it is treated as property and capital gains tax applies you must determine that a $ cup of coffee for $2 in a Bloomberg sample illustration today will trigger a $1 capital gains but a gross income of $2 for the coffee shop in a example listed on Bloomberg today.

The IRS states that the general tax principals that apply to property transactions also apply to Bitcoin:

  • Wages paid to employees using a virtual currency are taxable to the employee. Must be reported on the W-2form and are subject to the federal income tax withholding and payroll taxes. Also, the income level applies the applicable percentage paid that is calculated toward social security tax payment.
  • Independent contractors and other service providers are taxed and self-employment tax rules apply and must be listed on the Form 1099.
  • Capital gain and loss from the sale or exchange of the virtual currency depends upon whether it is a capital asset in the hands of the taxpayer.
  • A payment made with virtual currency is subject to information reporting to the same extent as any other payment made in property.

The IRS listed in its 2014-14 notice several examples of income and gain. A person who has done ‘Bitcoin’ mining and receives payment for services in bitcoin pays taxes as income on the fair market value of the bitcoin on the date of receipt.

If mining is done as a business, then the bitcoin is considered income of the business and subject to reduction of business expense deductions. Self-employment tax is applied to the net income.

The same rule is applied when a business makes a fixed income payment that is $600 or greater and must be reported. The same 1099C form applies to the business.

Since the IRS ruling means Bitcoin investors will be treated like stock investors then a bitcoin held more than one year will have a lower capital gains tax at a maximum 23.8 compared with the top rate property tax of 43.4%. This is why Bitcoin investors must be careful to keep records as to which date they purchase the bitcoin from an exchange transaction and when it is sold or used to purchase an item. Also, capital losses may be deducted at tax report filing up to $3000.

'It is the government’s responsibility to inform the public about the rules they are required to follow,' states Nina Olson, who runs an independent office within IRS, wrote in her annual report to Congress in January. 'The lack of clear answers to basic questions such as when and how taxpayers should report gains and losses on digital currency transactions probably encourages tax avoidance.'

To find more information about Bitcoin view the articles listed below in Author’s suggestions and view the video atop this article on the IRS Bitcoin ruling released.

Twitter Victoria Wagner@victoriaross888