The IRS made its first pronouncement on bitcoin and other virtual currencies Tuesday, declaring them property instead of currency.
In a statement released on IRS.gov, the bureau acknowledged that, "In some environments, virtual currency operates like 'real' currency ... but it does not have legal tender status in any jurisdiction." Generally speaking, that means that "tax principles that apply to property transactions apply to transactions using virtual currency."
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The news was welcomed by many as a legitimization of virtual currencies, however the announcement was bittersweet for those "mining" bitcoin and those investing in it, as they're now facing both income taxes and capital gains taxes.
In a blog post, bitcoin pricing index Coindesk wrote, "The increased clarity – provided three weeks before the end of the US tax year – will come as a relief to many who were scared to get involved in bitcoin, commercially."
Coinbase, a bitcoin bank with more than 1 million consumer accounts, also welcomed the clarification with a tweet.
Democratic Sen. Tom Carper said in a statement that the IRS guidance "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."
According to Reuters, bitcoin began circulating in 2009, and its present market value stands at $8 billion, with 80,000 transactions occurring daily.
Some worry that the number of transactions may dip with the new rules, primarily as a result of decreased liquidity.
Those mining bitcoin or receiving it as payment are subject to the same income reporting as anyone receiving dollars, however the day-to-day value fluctuation of each bitcoin could be subject to capital gains and losses reporting and taxation if held. That means that each time a bitcoin is spent, the spender may need to figure out how much they gained or lost in dollars while holding it, and report in on their taxes.
The announcement comes as the Securities and Exchange Commission continues its investigation into whether the bitcoin market should be regulated.
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