Virtual currencies such as bitcoin will be taxed as property rather than currency, the Internal Revenue Service said Tuesday in long-awaited guidance on online tender.
The guidance is the first the IRS has issued regarding the burgeoning world of online currency in which owners of bitcoins and other measures can hold or trade the goods. Some retailers around the world even say they will accept bitcoin for purchases, pronouncements that make a splash in the online world but, the IRS said, have no bearing whether bitcoin is simply another version of the dollar, euro or yen.
“Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value,” the IRS wrote. Such virtual currency may “operate’ like ‘real’ currency” in some cases, the agency wrote, “but it does not have legal tender status in any jurisdiction.”
That means the IRS will tax virtual currency transactions the way it taxes property such as stocks, stipulating in the guidance that “a payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.”
Changes in value of the currency would be treated as capital gains for the taxpayer depending on the value at purchase, with bitcoin investors treated akin to stock investors.
Sen. Tom Carper, D-Del., a member of the Finance Committee, said the guidance “provides clarity for taxpayers who want to ensure that they’re doing the right thing and playing by the rules when utilizing bitcoin and other digital currencies.”
Carper and Sen. Tom Coburn, R-Okla., urged the Treasury Department to issue guidance last year; Carper suggested better regulation of virtual currency transactions would help “narrow our nation’s estimated $385 billion tax gap” between taxes owed and taxes paid.
Terri Henderson, 6, center, whose mother is El Salvador, attends a rally with members of Congress at Union Station's Columbus Circle to announce the Restore Opportunity, Strengthen, and Improve the Economy (ROSIE) Act on July 29, 2014. The legislation provides incentives for government contractors to pay a living wage and other benefits that would help low-income workers.