A proper tax regime for U.S Bitcoin users is up in the air as the IRS doesn’t know how to classify Bitcoin.
To the taxman, what is Bitcoin? Is it a currency? Commodity? Or Asset?
As there is no definite answer, and that will make things difficult for American Bitcoin users come tax season. While a federal judge has ruled that Bitcoin is a currency, the Internal Revenue Service has yet to decide whether it will adopt that position.
“The IRS is aware of the potential tax-compliance risks posed by virtual currencies,” the tax agency said in a statement to the National Journal . “The IRS continues to study virtual currencies and intends to provide some guidance on the tax consequences of virtual-currency transactions.”
As Bitcoin becomes more accepted by mainstream retailers such as Overstock.com, Tiger Direct, and hotels in Las Vegas, the IRS has a massive incentive to create a proper tax regime for the cryptocurrency. Without a system in place, the agency would be losing out on potentially millions in tax revenue.
Until a proper tax system is put in place, one accountant recommends reporting the earnings of converting Bitcoin to cash as capital gains.
“If you made a best effort, added and documented your process, that if the IRS were to question it, it most likely would be allowable,” said Janet Lee Krochman, a chartered accountant in Southern California, to the National Journal.
Once the IRS makes a firm decision on Bitcoin other countries will likely follow suit. Recently Canadian authorities have declared that Bitcoin is not a legal tender, complicating things for users in a country that is home to the world’s second-largest userbase of the cryptocurrency.
Source: National Journal