So the IRS has finally issued important tax guidance for Bitcoin and it turned out exactly the way I suspected it would. By treating Bitcoin as “property” and not “currency” the IRS is saying that anyone who bought a bitcoin for a certain price and then spends it at a higher price is responsible for capital gains on the appreciation. Like with stocks, there will be a lower tax rate applied to BTC that has been held for more than a year. Miners will have to treat the bitcoin they receive as ordinary income.
The reason I am not surprised by the ruling is that it positions the IRS to gain as much as possible from early adopters sitting on huge gains. On the other hand, it may also encourage some people to spend their BTC “off the books.” Finally, it creates a gigantic pain in the ass for people spending BTC, particularly in years past.
As far as impact, I don’t expect there to be much of one. Since I anticipated this outcome, I am fairly certain most people in the Bitcoin community did as well. What I now expect to happen, is entrepreneurs will create user friendly software that will automatically account for your gains and losses so that individuals can have this recorded automatically.
One question that I still have is what happens to the BTC that miners earn and then spend. They are already taxed on the income, so are they taxed again when they spend it? I would guess the answer is yes, but I’m not sure. Would love to hear reader thoughts.
From Bloomberg:
The U.S. government will treat Bitcoin as property for tax purposes, applying rules it uses to govern stocks and barter transactions, the Internal Revenue Service said in its first substantive ruling on the issue.
Today’s IRS guidance will provide certainty for investors, along with potential income-tax liability. Under the ruling, purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of income for the coffee shop.
The IRS, faced with a choice of treating Bitcoins like currency or property, chose property.
Under the IRS ruling, Bitcoin investors would be treated like stock investors. Bitcoins held for more than a year and then sold would pay the lower tax rates applicable to capital gains — a maximum of 23.8 percent compared with the 43.4 percent top rate on property sold within a year of purchase.
For investors with losses, U.S. tax law allows taxpayers to subtract capital losses from any capital gains. They can also subtract up to $3,000 of capital losses a year from ordinary income.
Bitcoin miners would have to report their earnings as taxable income with a value equal to the worth on the day it was mined. If they mine as part of a business, they would have to pay payroll taxes as well.
The ruling takes effect immediately and covers past and future transactions and tax returns. The IRS said in the notice that it may offer relief from penalties to people who engaged in transactions before today and can show “reasonable cause” for any underpayments or failure to file.
Full article here.
In Liberty,
Michael Krieger
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Greetings, Michael,
Thank you for the great articles.
In reality, the IRS imposed tax upon Bitcoin is illegal, however, until it is challenged, people will pay it and all other illegal taxes.
All laws which are repugnant to the Constitution are null and void. An unconstitutional act is not law; it confers no rights; it imposes no duties; affords no protection; it creates no office; it is in legal contemplation, as inoperative as though it had never been passed.
The general rule is that an unconstitutional statute, though having the form and name of law, is in reality no law, but is wholly void, and ineffective for any purpose; since unconstitutionality dates from the time of its enactment, and not merely from the date of the decision so branding it.
No one is bound to obey an unconstitutional law, and no courts are bound to enforce it.
Any judges which do not uphold the Constitution should be impeached and replaced with judges who will uphold the Constitution.
Check out Aaron Russo’s, “America Freedom To Fascism” for a detailed explanation.
http://www.constitution.org/col/vieiraspeech.htm
Red Beckman 12 – 16th Amendment – The Law That Never Was
http://www.youtube.com/watch?v=grjmnkj7LT4
God bless and protect you all!
I agree with what you say however they have force behind it. It’s to late unless the masses rise up and say no but I don’t think that will happen anytime soon until people get hungry.
I think it makes Bitcoin harder to use like a currency because of all the reporting requirements to track every Bitcoin ever owned. It does not impact its use as a place to put savings much unless someone planned on not paying any taxes. That was always going to violate tax law, but this makes that clear. It probably won’t bother Bitcoin users much, but will make it harder to gain mainstream acceptance in my opinion.
Another words, no one short of a corporation with official books will actually report bitcoin transactions or mining, it’ll be just added to the 3 trillion dollar cash economy. IRS trying to understand and track anonymous Bitcoins, they barely know what it is. LOL.
You’re telling me I anonymous mined bitcoin, then I buy something person to person anonymously and I’m expect to raise my hand and report it. If more then 10% of the community reports it I’m in awe.
I’m pretty sure money is also considered property under a case called Lugar v Edmondson Oil Company, that is why they cannot take your income tax refund, without due process (5th). I also think a retroactive law is prohibited in the constitution, ex post facto, I believe, it’s called. So I would think they would have to use the current value of bitcoin as a starting point and take gains and losses from there.
It compares to Lincoln and the greenback, the boys aren’t in control of this money. Viola, now they are! Now you will be able to sue for damages in cases involving bitcoin, using; interest, and inflation as more damages suffered. Treble damages for fraud. Bitcoin is now money under the law in my opinion.
I think it’s good there are some rules being laid down. Rules help everyone understand things. On the other hand, the possibility that the Internal Ridiculous Service is going to be able to enforce or track capital gains on Bitcoin is zero.
That is until they decide that smart phones are the weapons of terrorists and decide they have to SCAN every smart phone before people get on that plane from NY to Florida. Get ready the for roll out of smart phone scanners. They will be right next to the body scanners and luggage scanners.
As with all the other cover stories it won’t be about terrorism, it will be about what private information they can get their greedy little fascist hands on in your phone as well as that Bitcoin wallet that’s in there too. These people are so predictable.
Barney knows. So should you . . .