Taxing bitcoin

You may have heard of bitcoin, the online “currency” causing quite a stir in recent times. Unlike many other online payment systems, bitcoin is outside the normal banking and currency systems – see more here about its history etc.

Being outside the normal banking and currency systems means the value of a bitcoin is difficult to determine. And, without going into too much detail here, speculators have caused the value of bitcoin to rise.

So now for the tax bit. An article from the Wall Street Journal last December noted some difficulties the IRS (and other tax authorities I’m sure) are facing. First, is a holding of bitcoin an asset which might be subject to capital gains taxes? It may be, but the first thing one needs to value an asset is a value ideally based on a market or cost basis. This might be tricky with bitcoin, given that it is not a real currency and the market is unregulated. Second, could gains or losses be treated as income? This is probably workable, as a gain or loss could be recorded on sale of bitcoins. But normally, marginal income taxes are higher than capital taxes. This would be fine for the tax authority I am sure, but holders of bitcoins might argue for the asset option – and so might their tax advisors. Only time will tell which option will be used.