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Questions Over the Taxation of Bitcoins Becomes More Pressing

Author: Scarinci Hollenbeck, LLC

Date: January 3, 2014

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The growing popularity and adoption of the bitcoin among Americans and businesses have put lawmakers and tax agencies in an awkward and tough position when it comes to determining whether they should tax digital currency, and how taxation would work. Following some countries’ decisions to apply tax rules to virtual currency, many U.S. lawmakers are now scrutinizing their own tax stance and trying to determine how best to treat the taxation of bitcoins.

The Wall Street Journal reports that as of mid-December, the value of all bitcoins in circulation was nearly $8 billion, and the price of a bitcoin has risen from about $13.50 to about $650 on some exchanges over the course of 2013. Given the rising value of the currency, and the fact that many Americans have used to them to make real world purchases or to cover goods and services, the currency, in any other circumstance, would be considered taxable. However, reporting rules simply don’t exist, Omri Marian, a professor of law at the University of Florida, told the Journal.

“People who invested in bitcoin or used it to buy goods or services this year have gains or losses, but no rules for reporting them,” Marian explained. “What should they do in April?”

Additionally, legal and tax experts say that questions about how to classify the bitcoin will also affect the way in which lawmakers choose to tax them. For instance, government officials will need to determine the circumstances under which the bitcoin be considered a commodity, a currency, or a capital asset for tax purposes, as well as whether bitcoin transactions are similar to barter. With the Internal Revenue Service focusing more attention and resources on the crackdown of tax evaders and illegal offshore account transactions, agency officials will also be charged with establishing rules for the anonymous currency as it relates to offshore accounts.

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