Bitcoin as Property: Did the IRS Get It Right?

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Source: Thinkstock

Source: Thinkstock

The market doesn’t have to fully accept something in order for it to be taxable — at least, that’s the position that the Internal Revenue Service appears to have taken in relation to bitcoin. On Tuesday, the IRS issued a notice declaring that for tax purposes, virtual curries like bitcoin will be treated as property and explicitly won’t be treated as true currency.

The implications of this notice are fairly significant. Up to this point, bitcoin miners, traders, exchangers, and investors have occupied a legal gray area, operating on the radar but generally outside the jurisdiction of regulatory authorities, including the IRS. The notice simultaneously expands the reach of the IRS and brings bitcoin closer to the mainstream. Ostensibly, this should facilitate the adoption of bitcoin as a more legitimate financial asset or currency (depending on your position). However, it could also add some friction to bitcoin transactions.

It’s important to point out that the ruling treats bitcoin more like a financial asset than a true currency. As property, those who wish to use bitcoin as currency will be perpetually sensitive to both its market value and its basis, or the market value when they received bitcoin either in payment or exchange, or if they generated it through mining. If you realize a gain or loss on the sale or exchange of your bitcoin, the character of that gain or loss will depend on whether bitcoin is being treated as a capital asset (such as a stock or bond) or as inventory or property.

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