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IRS Says It Will Treat Bitcoins As Property, Not Currency

In a new rule released on Tuesday, the Internal Revenue Service says it will treat bitcoin and other virtual currencies as property.

The Wall Street Journal reports this means any profits made on the currency will be taxed at the capital-gains rate and that investors will have to keep extensive records.

The Journal adds:

"The announcement in general was expected to be greeted favorably by the fledgling industry, and many had anticipated exactly this result. But the announcement also served as a reminder that new technologies often can't avoid being subject to the old rules for long.

"In a notice, the IRS said that it generally would treat bitcoin held by investors much like stock or other intangible property. If the virtual currency is held for investment, any gains would be treated as capital gains, meaning they could be subject to lower tax rates.

"The top long-term capital-gains tax rate is 20%, while the top ordinary income-tax rate is 39.6%, although add-on taxes often make both rates somewhat higher. But as capital investments, loss deductions from bitcoin often would be limited, whereas currency losses can be easier to deduct up front."

Bloomberg explains that this brings clarity to investors who have been buying bitcoins for years. The IRS, one tax law expert said, is trying to avoid the "creation of an electronic black market."

The news service explains the rule like this: "Under the ruling, purchasing a $2 cup of coffee with bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of income for the coffee shop."

As NPR's Emily Siner reported, bitcoin has a checkered history since its inception in 2008. The currency has been banned in some countries, and one of its largest exchanges, Mt. Gox, went dark after a debilitating theft.

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