BITCOIN TAX EXPERT: IRS Ruling Creates 'Quite A Burden' For Digital Currency's Users

Strongest man weightlifterREUTERS/Yuri MaltsevU.S. strongman Andy Vincent strains as he lifts a weight during the Pacific Strong competition in Russia’s far eastern port of Vladivostok August 14, 2011. Vincent and teammate Travis Ortmayer took on and beat a Russian team in various tests of strength.

The IRS has ruled Bitcoin should be treated as property instead of currency for tax purposes.

What does this mean for Bitcoin users?

We turned to Tyson Cross, a San Diego-based the lead attorney at BitcoinTaxSolutions. We previously spoke with Cross about how to file Bitcoin income presuming the IRS would not come in with guidance prior to April 15.

Now we know how the IRS feels: Through this ruling, every Bitcoin transaction — including anytime you sell Bitcoin — can now be taxed, just like a capital asset, Cross says. That means you must track virtually every transaction you make. As he explained to us in an email:

Users will have to track their transactions and determine the amount of their taxable gain each time. It’s quite a burden. The rules on taxing foreign currency provide an exception for “personal transactions” for that very reason. It would be great to have that exception (or something similar) apply to bitcoins as well.

The only mitigating factor here, he says, is that this guidance is not likely to be final: the IRS called for additional public comment on the issue, a sign the government is amenable to reconsidering its position, Cross said.

Next step is for the Treasury Department to start develop regulations in the taxation of virtual currencies. That typically begins with a request for public comments, which was included in the notice. Tax professionals can then identify issues and advocate possible solutions. So between now and the issuance of actual regulations (which takes years), there’s ample opportunity to shape the tax treatment.

The other main takeaway for the somewhat average Bitcoin user is fairly straightforward: If you mine Bitcoin, they count as income right away, separate from the time you may end up selling them, a transaction that is also taxable.

There is a whole separate set of conclusions for those paying and receiving wages in Bitcoin, namely that it’s subject to federal income tax withholding, FICA tax and FUTA taxes, and must be reported on a W-2.

You can view the full guidance here »

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