Article prepared by and republished courtesy of our colleagues Joseph Langhirt and David Plewa; originally published here: http://www.dlapiper.com/en/us/insights/publications/2014/04/bitcoin-is-property-not-currency/.
The Internal Revenue Service has joined several other jurisdictions in publishing guidance regarding the income tax consequences of certain convertible virtual currency transactions.i IRS Notice 2014-21ii clarifies that existing general tax principles apply to transactions using convertible virtual currency and that such virtual currencies should be treated as “property” rather than “currency” for US federal income tax purposes. Classification as property may affect the timing and character of income, gain or loss. While the immediate implications of the Notice are apparent, the mid-term and long-term consequences are still being considered. The IRS has indicated that penalties may apply to taxpayers that have taken return positions that are inconsistent with its position in the Notice or that have failed to file the appropriate information returns.
Virtual currency, such as bitcoin, that is “convertible” (i.e., has an equivalent value in or acts as a substitute for “real currency”iii) and that is sold or exchanged or used to pay for goods or services in certain transactions has tax consequences that may result in a tax liability to the person disposing of such virtual currency and/or receiving such virtual currency.
In addition, such tax consequences may be immediate or deferred, and any tax imposed may be at varying rates, depending on the nature of the transaction and the type of person disposing of or receiving such virtual currency.
In the following paragraphs, we discuss the Notice and its immediate implications, and we point out some legal, factual and practical issues that the Notice raises.
Continue Reading Bitcoin is property, not currency, IRS says – Notice leaves many open questions about convertible virtual currencies