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 "General tax principles that apply to property transactions apply to
transactions using virtual currency," the IRS said in a statement,
meaning that bitcoins would be taxed as ordinary income or as assets
subject to capital gains taxes, depending on the circumstance.
Bitcoin, the best-known virtual currency, started circulating in
2009. Its present market value is around $8 billion, with up to
80,000 transactions occurring daily, according to accounting firm
PricewaterhouseCoopers LLP.
Recent incidents have brought the currency under new regulatory
scrutiny, such as the failure of Mt. Gox, a Tokyo-based exchange
that filed for bankruptcy after losing an estimated $650 million
worth of customer bitcoins.
Unlike conventional money, bitcoin is generated by computers and is
independent of control or backing by any government or central bank,
which its proponents like, but which also has led to calls for more
guidance on U.S. tax treatment.
The IRS supplied that in its statement, which dealt a blow to
bitcoin "miners," who unlock new bitcoins online. The IRS said
miners must include the fair market value of the virtual currency as
gross income on the date of receipt.
This change "is a disincentive to start looking for bitcoins," said
John Barrie, a partner with law firm Bryan Cave LLP, who advises
charities that receive bitcoins as donations.
NOT LEGAL TENDER
The IRS also said that virtual currency is not to be treated as
legal-tender currency to determine if a transaction causes a foreign
currency gain or loss under U.S. tax law.
For other forms of gains or losses involving virtual currency, the
IRS explained how to determine the U.S. dollar value of virtual
currency and said taxable gains or losses can be incurred in related
property transactions.
"The character of gain or loss from the sale or exchange of virtual
currency depends on whether the virtual currency is a capital asset
in the hands of the taxpayer," the IRS said.
If a taxpayer holds virtual currency as capital — like stocks or
bonds or other investment property — gains or losses are realized as
capital gains or losses, the agency said.
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However, when virtual currency is held as inventory or other
property mainly for sale to customers in a trade or business,
ordinary gains or losses are generally incurred, the IRS said.
Capital gains and losses are taxable and deductible at different
rates and amounts than ordinary gains and losses.
Democratic Senator Tom Carper, who chaired a Senate committee
hearing last year on bitcoin, said in a statement that the IRS
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."
MINERS HURT
New bitcoins come from a process called mining. Computer programmers
around the world compete to crack an automatically generated code
and the first to do so is rewarded with a small stash. This happens
about every 10 minutes.
Some online retailers will accept bitcoins as payment. The maximum
potential number of bitcoins in circulation is 21 million, compared
with around 12 million currently.
On the IRS guidance, William Lewis, a lawyer in Sunnyvale,
California, who represents a start-up company creating a platform
for virtual currencies, said: "This is going to be unfavorable to
bitcoin miners because they're going to have to include in income
the fair market value of the virtual currency on the date they mined
it.
"It's going to make life difficult for a lot of people who have been
mining over the past year, who have to go back and see what the
values were on those dates when they mined it."
(Additional reporting by Douwe Miedema;
editing by Steve Orlofsky)
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