The IRS has made the first substantial ruling concerning bitcoin. For tax purposes, the digital currency will be looked on as property versus a currency. In making the ruling for all transactions, it gives a level of certainty to investors and businesses that accept bitcoin. The rules governing it will be similar to that of stocks and barter transactions. Bitcoin did want to become the digital gold, so the barter rules make sense.

Investors would be treated like a normal stock investor. If you held onto the bitcoins for more than a year and then sold, your maximum tax rate would be 23.8%. Bitcoins bought and sold in the same year would be exposed to a maximum tax rate of 43.4%. If you happen to lose money in the past year, which a fair number of investors who bought at the top, you can deduct the losses from your taxes. The bitcoin write-off.

The standard $3,000 total deduction applies in cases where the bitcoin investor lost money in the investment.

Bitcoin dealers would be treated differently from investors. Miners would have to report their earnings as taxable income with the values assigned by the date it was mined. If you run the bitcoin mining as a business, payroll taxes would come into play. Basement bitcoin operations are about to get introduced to the self-employment tax.

The ruling takes effect immediately and is retroactive to cover past transactions. With the notice came the IRS statement that it may offer relief to those that underpaid or failed to file. Individuals would just have to show ‘reasonable cause’.

The move by the IRS comes three months after the Nina Olson, the national taxpayer advocate, pushed for the IRS to make a ruling on bitcoins.

“It is the government’s responsibility to inform the public about the rules they are required to follow,” Olson, who runs an independent office within IRS. “The lack of clear answers to basic questions such as when and how taxpayers should report gains and losses on digital currency transactions probably encourages tax avoidance.”

Now that the IRS has made the ruling, it gives bitcoin a bit more standing in the United States as the digital currency waits for other regulatory bodies to rule. With the price stabilizing in the wake of the Mt. Gox debacle, bitcoin can push for wider acceptance now that businesses know how to treat transactions.

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