Officially announced by the Internal Revenue Service earlier today, the government agency has ruled that all virtual currencies, such as Bitcoin, should be treated as property rather than regular income. This ruling is particularly advantageous to Bitcoin investors since the virtual currency falls under the capital gains tax and only applies when Bitcoin is spent. One of the main advantages to the capital gains tax is that it tops out at 20 percent while the highest tax bracket on income earned is nearly 40 percent.
Regarding the spending rule, capital gains are specific to what’s spent rather than what’s earned. For instance, if you purchased $50 worth of Bitcoin, then used that same amount of Bitcoin to purchase $100 of merchandise on Overstock.com after the Bitcoin doubled in value, that constitutes $50 in capital gains. It’s basically identical to stocks when value rises over time and spending the gained value would be considered a taxable event by the IRS. However, people that primarily use Bitcoin as an investment tool will likely appreciate the use of capital gains tax over traditional income tax.
Interestingly, anyone that’s still actively mining Bitcoin will be be forced to report mined currency as income, thus the virtual currency is subject to the payroll tax. Miners will basically have to keep track of when each allotment of Bitcoin was mined and the value of the currency at that time.
At this time, it’s somewhat unclear how the IRS plans to police and track Bitcoin collections. However, these rules offer a clear outlook to taxpayers for the future of all virtual currencies. The new rules are retroactive as well, thus the IRS is relying on Bitcoin users to amend previous returns. Bitcoin users that have already filed their taxes this year can still amend their returns as well. Any Bitcoin related income that ‘s not reported correctly may result in penalties on the taxpayer.
