IRS will tax Bitcoin as property, rather than as currency

The Internal Revenue Service has said it will treat Bitcoin as a form of property for tax purposes, rather than as currency, making it subject to similar rules as stocks and barter transactions.

The new rules announced Tuesday appear to be good news for investors, because any gains they make from buying bitcoins will be treated as capital gains, which can mean lower tax rates. But they could also mean that people who spend bitcoins to buy goods and services will have to keep detailed records of those transactions.

That’s because they’ll have to figure out any gains they make. For example, as Bloomberg noted, if a person buys a $2 cup of coffee with bitcoins they originally bought for only $1, they might have to report the $1 they made as a capital gain.

The IRS issued the guidance for Bitcoin and other virtual currencies in a 6-page document on its website Tuesday. It arrives shortly before the April 15 deadline for filing tax returns in the U.S.

“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency,” the IRS said.

People who receive bitcoins as payment for goods or services will have to calculate, as part of their gross income, the value of those bitcoins in U.S. dollars as the time they were received, the IRS said.

The same applies to those who “mine” new bitcoins using computers. They’ll have to include in their taxable gross income the value of the bitcoins at the time they mine them.

And employers who pay people in bitcoins will have to declare them on a W-2 form for the purpose of federal income tax, insurance contributions and federal unemployment tax. As with regular wages, that requirement generally kicks in when the amount reaches $600 or more.

The rules provide clarity for those investing in Bitcoin and were welcomed by attendees at a conference on virtual currencies in San Francisco.

“It’s a good thing,” said Micky Malka, founder of Ribbit Capital, which invested in several Bitcoin companies. The new rules will help to promote innovation and the industry around virtual currencies, he said.

Plus, he said, “any framework is better than no framework.”

Zach Miners in San Francisco contributed to this report.

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