Bitcoin is not real yet

Update 3/25/14: The IRS has updated its rulebook to include a method for taxing “virtual currency.” As we noted, this was the assumed course of action many thought the IRS would follow, and they have. What this means exactly is still speculation, but this Bloomberg article on taxing Bitcoin as capital gains does a good job presenting the pros and cons of this most recent development.

The genesis for this post was pretty simple. It began with a two-fold question: Do you pay tax on Bitcoin, and if so how? We can answer the first part right away: No, you do not, at least not yet. This leaves the second part up for discussion.

We don’t have an opinion on this issue so you shouldn’t view this post as a tax professional commenting on the future taxability of Bitcoin. Instead, we’ve put together a few media viewpoints for educational purposes. Remember, only death and taxes are certain—consequently, everything else is relative.

Actually, most of the questions regarding Bitcoin have to do with its longevity and security. In February, about 70% of worldwide Bitcoin transactions on the Mt. Gox exchange site were compromised by hackers and what was the equivalent of about $450 million was stolen. Back in January, in an article entitled “Taxing Bitcoin: IRS Review has Big Implications for Investors in Virtual Currency,” Forbes magazine described Bitcoin as a “sandbox for speculators” and a “marketing fad.” In light of this, you can see where questions about Bitcoin tax are perhaps premature. Bitcoin is not at a viable stage in its development to need to be taxed.

Regardless, there is a lot of interest in ways to turn a profit with Bitcoin,which we suppose means Forbes is absolutely correct in their “sandbox for speculators” assumption. A few preliminary ideas have been brought out including the Winklevoss’s idea of creating a fund that would trade Bitcoin. That kind of emphasis from investors certainly has the IRS and tax professionals considering the possibility of taxation as well as strategies to do so.

From the same Forbes article: “If Bitcoin is a capital asset … long-term gains and losses would be subject to preferential capital gains rates (23.8 percent for high-income taxpayers). However, losses of more than $3,000 could only be used to offset other gains and not ordinary income. Separate rules may apply to professional traders.”

As it stands, there’s our answer. Presently, Bitcoin when it will be taxed will be taxed as a capital asset. That would stand at least until Bitcoin became more viable in the eyes of not just the finance community, but first and foremost found use as real currency. That could happen, but who knows when?

There are Bitcoin ATMs, that work as a sort of Bitcoin depository, so maybe sooner rather than later?

Bitcoin, as a product of the Internet, is new and exciting and unregulated. There is a lot more to be said about it, and it seems like every week there is a new development. If you find Bitcoin an interesting topic, post about it in the comments. We want to hear what you think.

Give us a call at 425-483-6600, and we’ll do your taxes!


About the author

Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has owned his own small business, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

Leave a Reply