IRS Says Digital Currency is Property (March 27, 2014)
The IRS has ruled that Bitcoin and other digital currencies are property, not currency, and will be treated as such for tax purposes. The agency released a notice this week that although digital currency often operates like real currency, “it does not have legal tender status in any jurisdiction.” Instead, the agency considers digital currency to be property and subject to taxation rules for property transactions.
“The sale or exchange of convertible [digital] currency, or the use of convertible [digital] currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability,” according to the notice. Someone receiving digital currency as payment for a sold good or service, for instance, must include in his or her gross income the fair market value of the virtual currency in U.S. dollars on the date it was received. Such recordkeeping requirements could hinder take-up of digital currency, some observers fear. However, those holding digital currency as an investment got some welcome news in the notice; the IRS will treat appreciation of held virtual currency as a capital gain, and thus subject to a lower tax rate than ordinary income.
In other digital currency news, a Boston-based startup has launched an invitation-only, no-fee consumer platform for buying, selling and conducting transactions using Bitcoin. The company, Circle Internet Financial, also raised $17 million in venture capital, adding to the $9 million it raised five months ago. Meanwhile, a group of eight Bitcoin exchanges, wallets and ATM providers have joined to create the Bitcoin Identity Security Open Network. The companies said the network will offer a way to validate buyer and seller identities to instill trust between Bitcoin buyers and exchanges or wallets.