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IRS Says Bitcoin Will Be Taxed as Property, Not Currency

Using bitcoin to buy stuff just got a whole lot more complicated.

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Bitcoin and other virtual currencies will be treated as property, not currency, according to new tax information offered Tuesday by the Internal Revenue Service.

The IRS provided its first significant guidance for bitcoin aficionados — and their accountants — who have struggled to figure out how to account for any gains or losses they’ve had using the virtual currency.

The ruling ends significant uncertainty about the tax consequences of using the virtual currency, although many bitcoin users aren’t going to be happy about some of the rules.

Much of the guidance is relatively self-explanatory and expected, such as the IRS noting that wages paid in bitcoin are taxable and subject to federal income tax withholding and payroll taxes. Successful bitcoin miners will have to report the fair market value of their finds and include it as gross income, the IRS said.

The U.S. government will basically consider bitcoin similar to stocks or other property investments. Investors who hold on to the virtual currency could face a lower tax burden because any gains would be treated as capital gains (using the fair market value of the bitcoin on the day of the transaction).

But the IRS’s decision to treat bitcoins as property may create something of a tax liability and reporting headache for people who use it as, you know, currency. The agency’s guidance said using bitcoin to buy stuff could be considered a taxable event requiring users to figure out gains or losses and report the transactions for tax purposes.

See the IRS’s guidance for bitcoin users here.

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