How Does the Treatment of Bitcoins Differ From Other Currency?
Trading in other currency, for example Euros to Dollars, is not taxable and there is no filing or reporting necessary. Trading in Bitcoins though is treated more like owning stocks or real estate, where the gain or loss is considered an investment.
What about if I get paid in Bitcoins?
As some employers have started paying salaries in Bitcoins this becomes increasingly complex. The pay you receive in Bitcoin is taxed as income at the rate of exchange on the date the payment was received. Then if you keep the funds in bitcoin and later use them to buy goods or services, any gain or loss on the Bitcoin for the conversion rate on the date you used them is considered a capital gain subject to tax, or a deductible loss.
How Do I Determine the Conversion Rate?
As there is no average conversion rates listed by the IRS or Treasury Department at this time, the IRS has left this up to the discretion of the taxpayer to use any rate within reason, as long as it is consistantly applied.
These Rules Just Came Out, Do I Owe Tax For Bitcoins Over Past Years?
Yes, these rules must be applied retroactively, and the IRS can audit up to seven years in the past. There is amnesty available right now to not pay penalties such as the late filing and underreporting income penalties that can add up to 50% of the tax liability due easily. For more information on this amnesty please contact us.