Essay About Irs Classification Of Virtual Currency And Capital Gains

Irs Classification of Virtual Currency as Property
IRS Classification of Virtual Currency as PropertyNeed for IRS DeterminationBitcoins and similar virtual currencies have become popular mainly in the lastyear or two, and the prevalence of their use prompted the IRS to come up with asolution to a problem that was relatively new: how to classify virtual currency for taxpurposes. Essentially, the IRS could determine that such currency would be treated asa foreign currency being held and traded by Americans and inside the United States orproperty, which would effectively make the Bitcoin economy a barter system.IRS DeclarationIn notice 2014-21, the Internal Revenue Service published a declaration makingit clear that Bitcoins and all virtual currencies are going to be treated as property for thepurpose of all taxation.2 “For federal tax purposes, virtual currency is treated asproperty. General tax principles applicable to property transactions apply totransactions using virtual currency.”3 It seems that the IRS reasoned that trading inBitcoins is more like the trade of stocks and bonds than the use of internationalcurrency.Effect of Declaration on the Use and Taxation of BitcoinsThere are a few major taxation ramifications of the IRS statement setting out therule that trading in virtual currency should be treated as trading in property.5 Theseinclude the necessity for a basis adjustment and the tax on capital gains, both of whichhave certain subrules.Basis SystemGains and losses from dealings in property are computed using the basissystem. Although there are several rules that affect the computation and adjustment ofone’s basis in property, the very general idea is that we take into account the price paidfor the property as an individual’s basis in that property; we use that number at the timeof the eventual sale of that property to determine whether a gain or a loss has occurreddue to the holding of that property.The IRS notice states, “If the fair market value of property received in exchangefor virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, thetaxpayer has taxable gain. The taxpayer has a loss if the fair market value of theproperty received is less than the adjusted basis of the virtual currency.”7Capital Gains TaxThe Capital Gains tax is intended to tax the profits made by individuals on certainproperty. One of the principles of the tax system is that gains on property are taxable,but the amount of the capital gains tax that one will pay in the United States is affectedby how long the asset has been held.8 Property such as stocks and bonds – and nowvirtual currency – that is held for less than one year, is said to be short-term.9 Short-term