Crypto currencies, such as the popular BitCoin, have been going through some growing pains over the past few months. Between issues with hackers, the fraud and closing of the popular trading service, Mt. Gox, many people have had questions about how stable these currencies can actually be. Many experts suggest that these types of troubles are just something the new form of currency must go through before they can start to stabilize and be more widely accepted. For others, however, these issues are just symptoms of having a non-centralized currency.
The IRS has decided to weigh in on their thoughts concerning BitCoins, and other digital currencies. On Tuesday, March 25th, they announced that for tax purposes, BitCoins and all other crypto currencies are to be treated as property, and not as currency.
The IRS statement said, “General tax principles that apply to property transactions apply to transactions using virtual currency.” The statement was directed at the BitCoin miners who ‘mine’ the coins by allowing complex algorithms to be processed on their computer. The property designation, however, will apply to those who accept BitCoins for goods or services, or those who use them to pay as well.
The statement specifically said, “The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.” This is obviously a complex issue, but the bottom line is since the currency is not a currency, it is not subject to the same tax rates as investment property. By taxing it as property with normal gains or losses, the IRS is likely to be able to bring in more revenue.
William Lewis, an attorney representing a start-up in the Digital Currency market said, “This is going to be unfavorable to BitCoin miners because they’re going to have to include in income the fair market value of the virtual currency on the date the mined it. It’s going to make life difficult for a lot of people who have been mining over the past year, who have to go back and see what the values were on those dates when they mined it.”
While this statement from the IRS does provide some additional guidance on how people are to treat digital currencies, there are still many questions. Especially for the growing number of marketers and businesses that accept BitCoin or other crypto currencies.