IRS Will Tax Bitcoin, Says It's Not Currency

In a historic ruling, the IRS said Bitcoin is property, not currency, and will be taxed as such. Here's what you need to know.

learn more about Kim Lachance Shandrow

By Kim Lachance Shandrow • Mar 25, 2014

Opinions expressed by Entrepreneur contributors are their own.

Rupert Murdoch dismissed Bitcoin as "just a joke." Goldman Sachs cautioned that it "can't work as a currency." And now the IRS has joined the amplifying Bitcoin doubter chorus, officially deeming the controversial currency not a currency at all. But it's not above taxing it.

The Feds have finally made up their mind about Bitcoin, ruling today that it and other virtual currencies will be taxed as property, not currency. You can read the full text of IR-2014-36 here.

The ruling immediately went into effect, conveniently just 22 days before the April 15 tax filing deadline. Unleash the tax lawyers on Bitcoin millionaires, because it's game-on in the eleventh hour.

Related: Mt. Gox Mysteriously Finds $114 Million Worth of 'Missing' Bitcoins

The historic ruling means that individuals with Bitcoin (or any other virtual currency) holdings will have to pay taxes to Uncle Sam on them, just as they would on stocks, intangible commodities or other valuable assets. They will also be taxed on wages earned in virtual currency, as well as on payments received in virtual currency.

"In some environments, virtual currency operates like 'real' currency, but it does not have legal tender status in any jurisdiction," the IRS said in a statement released today. "Virtual currency is treated as property for U.S. federal tax purposes" and "general tax principles that apply to property transactions apply to transactions using virtual currency."

Wages paid to employees in Bitcoin or other virtual currency "must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes," the IRS said in the ruling. "Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply."

Related: Coinbase Snags Top Execs From Facebook, Amazon

The ruling further clarifies the IRS's long murky view of Bitcoin, clearly stating that it is a capital asset, not a legal tender. It also reportedly specifies that anyone who deals in virtual currencies, including merchants, are now subject to "extensive record-keeping requirements, and taxes, as other people and other deals."

Senator Tom Carper, a Delaware Democrat, was quick to laud the IRS ruling, according to The New York Times. "The Internal Revenue Service's guidance today provides clarity for taxpayers who want to ensure that they're doing the right thing and playing by the rules when utilizing Bitcoin and other digital currencies," he said.

For more information, check out the IRS's 16-question FAQ on its brand new virtual currency guidelines.

Kim Lachance Shandrow

Former West Coast Editor

Kim Lachance Shandrow is the former West Coast editor at Entrepreneur.com. Previously, she was a commerce columnist at Los Angeles CityBeat, a news producer at MSNBC and KNBC in Los Angeles and a frequent contributor to the Los Angeles Times. She has also written for Government Technology magazine, LA Yoga magazine, the Lowell Sun newspaper, HealthCentral.com, PsychCentral.com and the former U.S. Surgeon General, Dr. C. Everett Coop. Follow her on Twitter at @Lashandrow. You can also follow her on Facebook here

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