The Internal Revenue Service (IRS) has finally released its guidance on how Bitcoin should be treated for tax purposes – and it’s bound to make the digital currency harder to use.
The IRS has decided that Bitcoin is to be treated as property – not currency – for the purposes of taxation.
That’s good news for people who are investing in Bitcoin rather than using it to buy things. It means that anyone who buys and holds bitcoins for a year or more will pay capital gains rates of 15% or 20%, depending on income level, as opposed to individual rates, which top out at 39.6%.
Bitcoin traders will need to track their activities, but the new IRS rules mean that Bitcoin exchanges will have to send their customers annual statements, just like a brokerage.
But for those who buy bitcoins to spend, the ruling creates significant complications.
People will need to track not just how much they paid for the bitcoins to get their cost basis, but how much the bitcoins were worth when they spent them. The difference is the gain or loss they need to report to the IRS… multiplied by the number of Bitcoin transactions they made over the course of the year.
“People might just be tempted to hoard rather than spend, because as soon as they spend they would be liable to incur capital gains taxes,” Pamir Gelenbe, the co-founder of the CoinSummit conference and a partner at venture capital firm Hummingbird Ventures, told The New York Times.
Although keeping track of every Bitcoin transaction sounds like a nightmare, the fact that it’s a digital currency also presents a possible solution.
“I can assure you that there are a number of companies that have come up with software to automate this entire process,” Barry Silbert, chief executive officer of SecondMarket, told The New York Times.
Indeed, the positive reaction from Bitcoin companies to the IRS announcement suggests that they see opportunity in the new rules.