Bitcoin has been all over the news lately, and you may be asking – what exactly is it? Bitcoin is a virtual currency. Only existing online, it’s powered by its users and not backed by any government agency. This new currency offers anonymity, convenience, helps facilitate international commerce and can fluctuate in value. Check out www.bitcoin.org for more information and frequently asked questions.
The Popularity of Bitcoins
Bitcoins are gaining in popularity and retailers such as Overstock.com have started accepting Bitcoins as payment. While retailers are quickly jumping on the Bitcoin bandwagon, the IRS hasn’t been as swift to act. In fact, the IRS’ inaction has left many tax preparers and investors alike questioning Bitcoins’ tax consequences.
This lack of clarification has led the National Taxpayer Advocate (NTA) to include digital currency on the list of IRS’ most serious problems of the year. The NTA is seeking guidance on the following questions:
- When will receiving or using digital currency trigger gains and losses?
- When will these gains and losses be taxed as ordinary income or capital gains?
- What information reporting, withholding, backup withholding, and recordkeeping requirements apply to digital currency transactions?
- When should digital currency holdings be reported on FBAR or Form 8938, Statement of Specified Foreign Financial Assets?
Bitcoins As A Capital Asset
If Bitcoins are treated as a capital asset, taxpayers will be afforded more favorable capital gain tax rates (top rate of 20 percent in 2014). Losses would only be allowed to offset other capital gains or would be limited to $3,000 per tax year.
Others disagree with capital treatment, and feel Bitcoin should be taxed as currency. Any gains or losses resulting from fluctuating values would be taxed at ordinary income rates (top rate of 39.6 percent in 2014). Losses would be fully deductible.
Foreign Impact of Bitcoins
Another question many are asking is whether offshore account reporting rules will apply. Will Bitcoins in eWallets on foreign servers meet the reporting requirements? Noncompliance with foreign reporting can result in significant penalties.
Then there is the whole recordkeeping dilemma. No institution is keeping Bitcoin records nor issuing 1099s. The burden will be on taxpayers to maintain the necessary documentation. And many feel the anonymity of Bitcoins and lack of documentation will lead to underreporting of income and encourage tax evasion.
Bitcoins and Tax Help
There are many questions to be resolved and undoubtedly many more questions will arise as Bitcoin evolves. Until the IRS issues clarifying guidance, contact Rea & Associates. Our team of Ohio tax professionals can consult with you if have undertaken or are contemplating Bitcoin transactions. The key is to take a reasonable position and appropriately declare income, gains and losses.
Author: Meredith Mullet, CPA (Wooster office)