The IRS Looked at Bitcoin . . .

bitcoinsA couple months ago, I posted about the problems with taxing bitcoins. In short, we didn’t know if bitcoins were currency or property. Largely, of course, the difference is immaterial: receipt of currency or property constitutes the receipt of taxable income, and using property or foreign currency to acquire goods or services constitutes a taxable realization event.[fn1] The most significant difference is that if bitcoins were property, any gain or loss could be capital, whereas if they were a currency, that gain or loss would essentially always be ordinary.

Well, wonder no more! Yesterday, the IRS released a notice, in which it announced that, for tax purposes, virtual currencies (including cryptocurrencies like bitcoin) are property, not currency.

The IRS then provides essentially a FAQ, answering 16 potential questions about the tax consequences of acquiring, holding, and disposing of bitcoins and other virtual currencies. Some of the questions and answers are administrative, dealing with withholding and information reporting. Some are substantive, largely coming to the conclusions that I laid out previously.

One that surprised me:[fn2] when you successfully mine a bitcoin, you have income. The amount of income is the fair market value of bitcoins when you mine yours. As I type this, one bitcoin is worth just less than $588. That means that if I were to mine a bitcoin right now, I would have to include about $588 in my gross income. At the same time, my basis in the bitcoin would be $588. So if I then used my bitcoin to buy $600 worth of Alpaca socks, I would have $12 of gain on the purchase, not $600 of gain. And, as long as I wasn’t a dealer in bitcoins, that $12 gain would be a capital gain.

[fn1] That is, if you buy a new sofa by giving the seller a share of stock (i.e., non-cash property), you will be taxed on the difference between your basis in the stock (basically, the amount you paid for it) and the value of the sofa you receive.

[fn2] It’s probably the right answer, too. I just hadn’t been thinking in this direction.

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