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Think Bitcoin is currency? IRS says think again

Virtual currency to be treated as property

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Bitcoin and other forms of virtual currency have become more widely accepted, with companies from Overstock.com (OSTK), Virgin Galactic, Paypal (EBAY), Reddit, The Pirate Bay, Mint.com and Zynga (ZNGA) accepting the virtual money as a form of payment.

With the increase in digital currency acceptance, it was only a matter of time before the U.S. government stepped in to take its cut. On Tuesday, the Internal Revenue Service announced that, “for federal tax purposes, virtual currency is treated as property.”

That means that the tax principles that apply to property transactions also apply to virtual currency exchanges. “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received,” the IRS announced.

So when a company accepts Bitcoin or other virtual currency, or a $500,000 Balinese villa is purchased with Bitcoin, it is now the taxpayer’s responsibility to determine the value of the virtual currency in U.S. dollars at the time of the transaction and the recipient of the virtual currency would be responsible to pay taxes on the virtual currency as a capital gain.

Bitcoin is currently being exchanged at a rate of $589.05 for each bitcoin.

This decision brings Bitcoin a little more into the light of public view. One of the purposes of Bitcoin is to allow anonymous transactions, but now Bitcoin transactions will have to be recorded and reported to the IRS.

That also means that if a company pays its contractors in Bitcoin, the veil of secrecy will be removed. Companies will be required to treat the payment in virtual currency just like payment in dollars, which means that social security numbers or taxpayer identification numbers must be provided.

Bitcoin miners will also be subjected to the new tax rules. Bitcoin miners create more bitcoins by working out increasingly difficult algorithms that grow more complex with every solution.

“When a taxpayer successfully ‘mines’ virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income,” the IRS stated.

In late 2013, Bond New York made headlines when it became the first real estate firm to accept bitcoins for real estate fees.

“We are the first out there,” Kelly Kreth, head of public relations for Bond New York, and principal for Kreth Communications said in HousingWire’s March issue. “We accept Bitcoin for real estate transaction fees. We aren’t talking about accepting Bitcoin for the actual purchase – that would be between the buyer and seller.”

Transactions involving Bitcoin and other virtual currency, including real estate transactions, must now be reported to the IRS and taxes must be paid on any money earned in a Bitcoin transaction.

The impact of this decision on virtual currency users is yet to be determined. In some ways, the IRS decision legitimizes virtual currency. Now it’s just like every other form of property in the country. But maybe that takes some of the shine off of the “next big thing.”

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