As of March 25, 2014, the Internal Revenue Services will treat bitcoin and other virtual currencies as property. Until now, users of virtual currencies have skirted the taxation issue waiting for an official announcement on how the tax would apply.
The sub-culture of people using Bitcoin instead of U.S. currency utilize this currency for different reasons, but a majority do so in hopes of being exempt from taxation; there are people earning a living through Bitcoin and paying rent in Bitcoin, without claiming income or expenses on their taxes.
Although the anonymity and government regulation avoidance is credited for the success of Bitcoin, the reality is setting in that this is not a unground tax-exempt un-reportable currency.
Those ready to comply and compete as legitimate organizations will choose to adopt the new IRS rules. However, there is still risk that those refusing to comply and be part of the tax-abiding world might be the demise of the currency.
Bitcoin in Other Countries
Although Denmark declared Bitcoin trades as tax-free, UK is taxing just as other currencies and Australia is now taxing at a 10% GST. The United States Internal Revenue Department will generally treat Bitcoin held by investors much like stock or other intangible property, making them subject to capital gains tax.
According to the IRS, all persons who trade or do business in payments of $600 or more in a taxable year must report that information to the IRS and to the payee on Form 1099-MISC, Miscellaneous Income. Payments of virtual currency required to be reported on Form 1099-MISC should be reported using the fair market value of the virtual currency in U.S. dollars as of the date of payment. Source: IRS Newsroom
However as a tax attorney, our questions are
1. What about currency that hasn’t been taxed yet and how far back should we go?
2. Will taxpayers be penalized for not handling their virtual currency as property prior to March 25, 2014?
According the to IRS on their website here
“Taxpayers may be subject to penalties for failure to comply with tax laws. For example, underpayments attributable to virtual currency transactions may be subject to penalties, such as accuracy-related penalties under section 6662. In addition, failure to timely or correctly report virtual currency transactions when required to do so may be subject to information reporting penalties under section 6721 and 6722.
However, penalty relief may be available to taxpayers and persons required to file an information return who are able to establish that the underpayment or failure to properly file information returns is due to reasonable cause.”
Now determining at what value the Bitcoin will be valued at is a another blog post in itself.
If you’ve got questions, we can help!
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