Taxing Bitcoin: IRS Review Has Big Implications For Investors In Virtual Currency

Uncle_Sam08 Jan 2014 / Forbes – By now most everyone has heard of Bitcoin. But exactly what is it? And how should it be taxed?

Bitcoin is usually described as virtual currency. That’s useful shorthand, but is it really money? And should it be taxed as if it is? Or is it a capital asset? How about a commodity? And then there is the matter of using this quasi-cash to avoid taxes and regulation altogether.

The IRS says it is studying the matter but has yet to issue any guidance. Until it does, it is anyone’s guess how Bitcoin should be taxed. Most users/investors will simply pick what is most beneficial to them when they file their 2013 returns.

At the moment, Bitcoin and its cousin currencies have had far more success generating buzz than facilitating commerce. Yet, the idea of online money can’t be ignored.

Curiously, the motivating force for the IRS to issue guidance may be an effort by Cameron and Tyler Winklevoss (best known until now for their legal battle with Mark Zuckerberg over Facebook) to create an exchange-traded fund to track Bitcoin prices. The twins are awaiting SEC approval for their ETF but their very request raises important tax policy questions that need to be answered.

Back in November, Mindi Lowy and Miriam Abraham of PriceWaterhouseCoopers wrote a terrific review of the current state of play for Tax Notes Today (requires a subscription).  They concluded that for now virtual currency would probably be viewed as a capital asset since it has limited use as real money. However, should these vehicles gain wider commercial acceptance, they’d more likely be treated as actual currency for tax and regulatory purposes.

The distinctions are not trivial….. Read more

http://www.forbes.com/sites/beltway/2014/01/07/taxing-bitcoin/

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