Bitcoins are a peer-to-peer virtual currency created by a complex process called “mining.” There are currently around 11 million Bitcoins in existence, and Bitcoin mining will end once a finite number (21 million) of Bitcoins have been created. Bitcoin has been making headlines as of late. It initially caught attention for its increase in value and also when it recently declined. Earlier this month, the cumulative value of the currency had been reported as high as $1.5 billion, but it has since fallen to lower levels.
Bitcoin has been the recent subject of FinCEN guidance (2013-G001). It is to be seen if IRS and other tax authorities worldwide will follow suit in issuing guidance. Although it appears that any Bitcoins earned will be considered income, enforcement by tax authorities is perceived to be a nightmare.
Applying general principles, people who provide services or sell goods in exchange for Bitcoins would have income under Code Sec. 61, and those who exchange their Bitcoins for cash would realize gains to the extent of any appreciation (short or long-term). The capital gain treatment of Bitcoins generally follows the logic of those who argue that Bitcoin behaves more like a commodity than a currency, pointing to its volatility and the fact that people could be converting traditional currency into Bitcoin with an intent to make a profit rather than to spend it. There are a few less clear areas, including the tax implications of “mining” a Bitcoin and the effect of dealing with it on an international basis. IRS next? If Bitcoin continues its current momentum, IRS may, like FinCEN, be forced to address the issue. However, given the traceability and anonymity inherent in Bitcoin transactions, and the extreme fluctuations in value, cracking down on Bitcoin could prove difficult. Although the value of Bitcoins has recently plummeted, and some media outlets assert that the Bitcoin “bubble” has burst, the actual financial imprint of Bitcoin remains to be seen. However, it is also argued that, regardless of whether Bitcoin itself ultimately survives, it has established a model which will no doubt shape future transactions.
The information is from checkpoint news.