Taxation of Bitcoin and Other Cryptocurrencies
Bitcoin has repeatedly been in the news since it first came on the scene in the latter part of the last decade. However, many people have exhibited difficulty in understanding cryptocurrencies, in general, let alone how these assets are taxed. The evolution of taxation of cryptocurrencies, including Bitcoin, will undoubtedly become more prevalent as taxpayers and taxing authorities all over the world continue to pass new laws and regulations, particularly with respect to valuation.
So, what is Bitcoin? Bitcoin is a digital asset designed for an exchange that uses cryptography to control its creation and management, as opposed to centralized institutions, e.g. the Federal Reserve in the United States and the U.S. dollar. Instead, the system is based on a “peer-to-peer” network not tied to existing systems or national currencies.
How is Bitcoin taxed? In 2014, the Internal Revenue Service issued Notice 2014-21, which made clear that Bitcoin is treated as “property.” However, many issues were not addressed, e.g. how to value cryptocurrency received as income — Bitcoin is highly volatile, with the price of one single Bitcoin fluctuating by nearly $10,000 over the past couple of years.
Now, the IRS has indicated it will soon issue a variety of new guidance on how cryptocurrencies will be taxed, including specific guidance aimed to deter tax evasion, among other aspects. We will certainly provide updates as these new proposed regulations are issued.
In the meantime, here’s a fairly recent article featured on Forbes’ website explaining taxation basics of Bitcoin, providing comparisons with other assets: forbes.com.