How Would a U.S. Bitcoin Transaction be Taxed? – AICPA Insights

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Overstock.com, the Sacramento Kings and a few countries have all taken positions on what they will do with Bitcoins. The two major Bitcoin positions are treatment of it as property, as Singapore has recently adopted, or as currency, as Germany has chosen. Much has been written on the creation of the Bitcoin, and its rise in popularity – and value – from 5 cents in 2010 to over $1,200 in 2013. Bitcoins were born from combining electronic commerce and communications with mathematics, cryptography and privacy – as they only exist when your computer is functioning or your iPad, smartphone, tablet, smart watch or Google glasses!, and they have no intrinsic value, save for what value people are willing to give.Although the coins have the characteristics of a geeky board game currency and no country backs their value, they are being used worldwide as if they are real. And until people and companies decide these Bitcoins have no value, they are essentially “real,” at least until another mathematician comes out with a new version of a virtual currency that devalues the Bitcoin through its popularity.Is there a tax when using Bitcoins? When a Bitcoin is used to purchase a product or service, there is an exchange resulting in an agreed upon value for the coin. For the party using the Bitcoin, there is likely a gain or loss on the use of the coin, since it probably had a different value basis than when it was acquired. The taxation will be determined by the character of the Bitcoin in the transaction – is it considered property or currency? This is the primary question for the IRS and U.S. Treasury. Some in the digital currency community are pushing for treatment as property.Under either scenario, here is my take for how it could work in the U.S.: Bitcoins treated as property: As a type of investment or commodity, Bitcoin gains and losses would likely be taxed as capital gains. For individuals using the coins for non-business purposes, transaction gains would be taxable, but losses would likely be non-deductible. If it can be established the coins were held as [an investment, there may be support for capital loss treatment. For business transactions, capital gains and losses would be taxed using the existing tax regulations for the specific entity type. Bitcoins as currency: For businesses using Bitcoins, taxation would likely be treated similarly to existing rules for foreign currency under IRC section 988 – as ordinary income or loss on the exchange of the coin for value. However, section 988e requires that this treatment not apply to non-business transactions. Tax law then reverts to pre-1986 law, with a modification added for de minimis personal transactions: gains less than $200 are not taxed to the individual, measured on a per transaction basis. And, as above, non-business losses would be non-deductible.

via How Would a U.S. Bitcoin Transaction be Taxed? – AICPA Insights.

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