Follow Us:  twitter facebook RSS

IRS Issues Guidelines On Bitcoin Taxation As Governments Grapple With Virtual Currencies

Posted by Dino Londis  |  March 28,2014  |  07:08 AM

Bitcoin

By Dino Londis (Invests.com) – This week the Internal Revenue Service (IRS) took an official stand on virtual currencies like Bitcoin and signaled how the U.S. government will treat the encrypted currency for tax purposes.

The IRS says that Bitcoin acts as a “substitute for real currency,” but that transactions using Bitcoin and other virtual currencies will be treated as property transactions for tax purposes.

And “…when a taxpayer successfully ‘mines’ virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.”

So until now, mining Bitcoin used to cost the electricity and time required to produce it. Now the U.S. government expects to tax it at its value on the date it was mined.

Plus like bartering – which is also taxable – “anyone who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency.”

Back in November the U.S. government was making moves to regulate the currency. Benjamin Lawsky, Superintendent of New York’s Department of Financial Services, said the state would “consider the possibility and feasibility” issuing a BitLicense to businesses involved in encrypted currency transactions and activities.

If the licenses come to be, businesses will need one to engage in virtual currency transactions and activities, as yet to be defined, in New York.

Lawsky said that unregulated use of Bitcoin and other virtual currencies invites crime such as drug smuggling, money laundering, gun running, and child pornography by underground groups like Silk Road.

“Our objective is to provide appropriate guard rails to protect consumers and root out money laundering—without stifling beneficial innovation,” Lawsky said in prepared remarks for an event at the New America Foundation.

Other countries such as Russia do not recognized Bitcoin as anything other than criminal money. It forbids any use of it for even legitimate purposes and writes (original in Russian):

“On the Central Bank of the Russian Federation, the official currency of the Russian Federation is the ruble. Introduction on the territory of Russia and other monetary units issue money substitutes is prohibited. Certain distribution received anonymous payment systems and kriptovalyuty (encrypted currency) including the most famous of them – Bitcoin are money substitutes and can not be used by individuals and legal entities.”

As in the U.S., Russian officials also cited Bitcoin as a means for money laundering.

The U.S. government regulation is part of a two pronged attack on Bitcoin and other encrypted currencies. While Russia strictly forbids any use, the U.S. is using it to track criminal activity.

Two months before Lawsky coined “BitLicense,” the founder of Silk Road thumbed his nose at the U.S. Government saying: “What we’re doing isn’t about scoring drugs or ‘sticking it to the man.’ It’s about standing up for our rights as human beings and refusing to submit when we’ve done no wrong.”

A month later, in October 2013, the U.S. Department of Homeland Security (DHS) seized the “Silk Road” website and made an arrest. It says, “The suspect was charged with a three-count indictment with conspiracy to distribute a controlled substance, attempted witness murder and using interstate commerce facilities in the commission of murder for hire.” Three more individuals were soon arrested outside the U.S.

The U.S. also collected 29,655 units of the digital currency from a raid on Mt. Gox. Today that’s worth $15.2 million. At the time the government – which is required to liquidate seized assets – didn’t know what it would do with the currency. Now that the IRS is issued official guidelines, it will sell them.

The consequences for Bitcoin – whether it’s embraced and taxed or outlawed – are unclear. But it is likely to increase volatility in its value. For example, if new coin is taxed, it could be sitting in a virtual state of near completion waiting for the market value to drop. That alone will increase the frequency of wild spikes in value and fuel gaming and speculation.

The U.S. and Russian governments’ actions may drive the criminal element from Bitcoin, but they will do little reduce the proliferation of anonymous crime.

This will also drive criminals to other less commonly known bitcoin-like currencies. RSA reports that this is well underway. It says “fraudsters” are adopting “forum specific currencies” that are structured so they can be immune to seizure.

They don’t want to be taxed, or need to shop at Overstock.com. Criminals need truly anonymous transactions. They’ll find it elsewhere.

Want to help the IRS craft governance? The Treasury Department and the IRS are requesting comments from the public regarding other types or aspects of virtual currency transactions that should be addressed in future guidance. Send your comments to: Notice.Comments@irscounsel.treas.gov. You should include “Notice 2014-21” in the subject line. The IRS says that all comments submitted by the public will be available for public inspection and copying in their entirety.

  Print     Email

About the author