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Saturday, December 21, 2013

WSJ: How Will the IRS Tax Bitcoin?

BitcoinWall Street Journal Tax Report:  How Will the IRS Tax Bitcoin?, by Laura Saunders:

Despite a recent plunge, bitcoin has had a banner year. Now comes the hard part—figuring out the taxes on it.

For the uninitiated, bitcoin is the most prominent of several "virtual currencies"—money that exists only online and isn't backed by any government. Released in 2009 by an unknown person or group going by the name Satoshi Nakamoto, bitcoin is maintained by a decentralized network of computers, called "miners," that process and verify transactions. As of Friday afternoon, the value of all bitcoins in circulation was nearly $8 billion, according to CoinDesk.

This year the price of a bitcoin has risen from about $13.50 to about $650 on some exchanges, down from a November high of about $1,200 just before concerns arose that China will crack down on the virtual currency.

Experts say, however, that there's no agreement on a host of fundamental questions for U.S. taxpayers holding or using virtual currencies. "People who invested in bitcoin or used it to buy goods or services this year have gains or losses, but no rules for reporting them," says Omri Marian, a professor of law at the University of Florida in Gainesville. "What should they do in April?"

Among the pressing issues: When should bitcoin be considered a commodity, a currency or a capital asset for tax purposes? Are bitcoin transactions similar to barter? Is bitcoin subject to the same stringent tax rules as secret offshore accounts? And how will U.S. officials keep bitcoin, which is even more anonymous than cash, from being used to promote tax evasion or money laundering?

So far, the IRS hasn't ruled on or addressed such issues directly. An agency spokesman released the following statement: "The IRS continues to study virtual currencies and intends to provide some guidance on the tax consequences" of transactions involving them. The agency is also "aware of the potential tax compliance risks posed by virtual currencies," he added.

Jennifer Isom (New Mexico), As Certain as Death and Taxes: Consumer Considerations of Bitcoin Transactions for When the IRS Comes Knocking:

Bitcoin is the first decentralized digital-currency. Due to the infancy and only recent popularity, consumers transacting in bitcoins are likely unaware of the tax implications involved. At this time, there are no known legal decisions on how Bitcoin transactions should be taxed. This paper explores the likely tax implications for everyday consumers exchanging bitcoins for property and services

Prior TaxProf Blog coverage:

http://taxprof.typepad.com/taxprof_blog/2013/12/wsj-how-1.html

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