Robert J. Fedor, Esq., L.L.C.

IRS announces it will treat bitcoins as property, not currency

Ohio residents have likely heard about or may have even used bitcoins. A virtual currency that originated in 2009, bitcoins are now accepted by many retailers and effectively allow an individual to purchase goods and services anonymously. In recent years, bitcoins have grown in popularity and the anonymity the virtual currency affords users has drawn the attention of and concern from government and law enforcement officials who contend the globally recognized virtual currency is readily used by individuals who are attempting to evade paying taxes or purchase and sell illegal drugs.

Until recently there has been confusion over how the government classified bitcoins. Last week the Internal Revenue Service announced it will treat bitcoins as property and not actual currency.

The IRS's decision has tax-implications for bitcoin users who will now be required to pay capital gains taxes on certain transactions. For example, if an individual purchased a bitcoin for $100 and within four months the value of that bitcoin increased to $200, the individual would be required to pay taxes on the $100 gain. Likewise, if the value of a $100 bitcoin fell to $50, an individual could claim the $50 as a loss.

The IRS is cautioning bitcoin investors and users to abide by the new tax regulations related to the virtual currently when filing their 2013 tax returns. However, given the ruling was announced in late March, bitcoin users who fail to comply with these new regulations may get a pass for the 2013 tax year. In the coming years, however, the IRS will likely strictly enforce and penalize bitcoin investors and users who fail to comply with these established guidelines.

Source: San Fransisco Gate, "IRS' bitcoin rules create clarity, concern," Kathleen Pender, March 26, 2014

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