The Tax Blog, Taxmachine.us has issued a press release stating that bitcoin is more like a currency than property, and “describes how existing general tax principles apply to transactions using virtual currency. The notice provides this guidance in the form of answers to frequently asked questions.”
Well, it’s too bad that taxmachine.us isn’t irs.gov, isn’t it? Because apparently I can’t just post things here and hope that they will be seen as having the full force of law. Sure, I’m an Attorney, but that doesn’t make me a powerful player like the IRS. Does tomtaxlawyer.com sound more legit? What if tomtaxlawyer.com and taxmachine.us BOTH issue press releases with FAQs attached? Stay tuned. I will consider drafting alternative FAQs if the market wants them. Tell me if you want me to give my own FA Q in the comments below.
But, just to avoid any confusion, see what the IRS actually said here.
I actually wrote about this over a year ago when I used to work at IRS Medic. Here’s what I wrote:
See, Section 988 deals primarily with establishing that when a business benefits from the appreciation of a foreign currency (for example, X billed Y in euros, and by the time X was paid, the EUR/USD had increased). When a business benefits from fluctuations in currency during a transaction, then the benefit is taxed as ordinary income. That’s basically what Section 988 is saying. Treasury Regulation 1.988-2(a)clarifies that normally, foreign currency gains are treated the same way as disposition of any other property is treated by the Code.
Section 988 is still in play here though (for individuals who use bitcoin as their currency of choice), because Section 988(e)(2) lets me off the hook for transactions where I would realize a “gain” of less than $200.00. I’m going to ignore the fact that the gain is actually measured in dollars and might not be a gain at all. The point is that if I purchase an e-book for $5.00, I don’t experience a taxable event as long as bitcoin is considered to be a “nonfunctional currency.“ Now. if I purchase a fancy TV or computer with my bitcoins, I might have to pay taxes on the “gain.”
But what if the gain is over $200? Then the transaction is treated similarly to a barter transaction.
Say, for example, that I bought a guitar at a garage sale for $50, but then I realized that the guitar was worth $900. If I give the guitar to my landlord instead of paying $900 in rent, I am supposed to report that gain of $850 on my tax return (Schedule D) as a “gain from the sale or other disposition of property.”
With appreciated nonfunctional currency, the situation is analogous once the gain exceeds $200.
Here’s an example:
For simplicity sake, assume I only got paid one paycheck in bitcoins, and the value of BTC at the time was $30.00. My gross pay was 40 BTC. For income tax purposes, I received employment income in the amount of $1200 (USD), I will report this employment income as ordinary income on my tax return. Now, BTC has risen to $90.00 and I got to buy a computer for 30 BTC. My “basis” in each BTC (if I choose to allocate it this way) is $30.00. The computer I am buying is worth $2700.00, and my total basis is $900. The result? I have realized acapital gain of $1800. I’ll need to report this on Schedule Dand 8949 as a capital gain.
The cool part is that if the situation were reversed, and I was spending BTC that had decreased in value, any loss that I experienced from dabbling in bitcoins would be nondeductibleunder section 165(c).
Ok – but what if the IRS doesn’t treat BTC as a currency? Well, then it gets really fun. If BTC is not a currency, then the $200 exemption under 988(e)(2) on recognizing gains from personal use of the BTC does not apply! If you think that BTC isn’t currency, then you should be reporting EVERY transaction you make with appreciated bitcoins to the IRS. Fun, right?
It is now clear that the interpretation the IRS is taking is that a bitcoin is more like a guitar than a dollar bill. But will it blend?
CORRECTION. A previous version of this post said “does it blend?” the correct terminology is “will it blend.”
CIRCULAR 230 DISCLAIMER:
Nothing in this fantastic blog post is intended or written to be used, and it cannot be used by the reader or any taxpayer/bitcoin fan/nontaxpayer/people who play satoshi dice/redditters (i) for the purpose of avoiding taxes or penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction.