Following up on Wedmesday's TaxProf Blog op-ed, Omri Marian (Florida): Bitcoin and Notice 2014-21: New York Times DealBook: Taxes Won’t Kill Bitcoin, but Tax Reporting Might, by Victor Fleischer (San Diego):
Bitcoin is a digital representation of value, not a real currency, according to the latest pronouncement from the IRS. The IRS on Tuesday released guidance indicating that Bitcoins and other so-called virtual currencies that do not have the status of legal tender in any jurisdiction would be treated as property, not currency, for tax purposes. The guidance also indicates that Bitcoin transactions are subject to the same information reporting and withholding requirements as similar transactions in dollars.
There were “no real surprises” in the guidance, according to Omri Marian, a University of Florida law professor who has written about the potential for Bitcoin to be used to evade taxes. The I.R.S. guidance follows similar action by taxation authorities in Japan, Canada and Australia. ...
From a business perspective, the most important aspect of the guidance may be buried in the plumbing. Payments made using virtual currency are now clearly subject to the same information and backup withholding requirements as other property transactions. ...
To the extent that Bitcoin’s success depends on anonymity and on avoiding the burden of government regulation, this I.R.S. guidance is an unwelcome blow. Bitcoin users are not accustomed to telling their counterparties who they are, let alone what their Social Security number is.
While some people may choose to ignore the I.R.S. guidance, more established digital economy merchants (like Etsy and eBay vendors) and settlement systems (like PayPal) will tend to comply.
Bitcoin cannot thrive in the underground economy alone, and unless its users pay taxes like other grown-ups, the I.R.S. guidance virtually ensures that it will be a passing fad.
Update: Tax Vox Blog, You Could Owe Capital Gains Taxes When You Spend Bitcoin, by Steven Rosenthal