The virtual currency Bitcoin is about to get a taste of real-world rules. The IRS has declared the digital money will be treated as property, like stocks, for tax purposes.
The news has been greeted with mixed emotions in the Bitcoin community. On one hand, it means people who buy and spend Bitcoins will be on the hook for lower taxes than they might otherwise have been, since the ruling generally imposes capital gains taxes on investors’ profits, rather than higher, regular tax rates. But the IRS also wants Bitcoin users to start keeping extensive records of their transactions, which could limit the digital money’s appeal.
For example, if a person bought a Bitcoin at $5 and sold it when the price is $1,000, for instance, he’ll have to declare and pay taxes on the $995 profit. But if he also bought another Bitcoin at $500 and spends it when the value is $1,000, the tax implications will be different.
That may ultimately hurt Bitcoin’s chances of becoming more widely used, some experts say, because one Bitcoin is no longer technically interchangeable with another. “If I have to figure out which particular Bitcoin in my wallet I want to spend and what the tax treatment will be, Bitcoin just doesn’t work as a commercial medium of exchange,” Adam Levitin, a law professor at Georgetown University, told the Guardian.
Others believe the IRS ruling signals that Bitcoin is finally entering the financial mainstream. If you are paid in Bitcoins for services you perform, for instance, those wages are now subject to federal income tax. “It’s getting legitimacy, which it didn’t have previously,” Ajay Vinze, the associate dean at Arizona State University’s business school, told the New York Times.
Still, the IRS may have difficulty enforcing the new rule, since Bitcoin’s online wallets offer users near anonymity. “The IRS can’t even get the information they need from normal consumer purchases,” Steven Rosenthal, senior fellow with the Tax Policy Center, told CNNMoney.