IRS moves to tax bitcoins

The U.S. government on Tuesday took the first step toward taxing bitcoins, declaring that the Internal Revenue Service will treat the currency like property.

The move could lend more legitimacy to bitcoin and other fledgling online currencies, while at the same time subjecting investors to new tax obligations.

IRS Commission John Koskinen told The Hill he hoped the new IRS guidelines would provide clarity.

"Hopefully the guidance put out on bitcoins and virtual currency will answer the bulk of the questions people have about how they are going to be treated by the IRS," Koskinen said. "Our hope is it will remove a lot of uncertainty."

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Under the guidance released by the IRS, wages paid to employees in bitcoins would be taxable and would have to be reported to the IRS by employers. Independent contractors paid in bitcoins would be required to pay a self-employment tax.

Bitcoin “miners,” individuals who use computers to process bitcoin transactions in exchange for transaction fees and extra bitcoins, would also have to pay a self-employment tax.

Furthermore, people who use bitcoins to make purchases would have to pay capital gains on however much their bitcoins had increased in value since they were obtained, much as one would a stock. For example, if $5 worth of bitcoin at the time of purchase had appreciated to $10, the bitcoin owner would face a $5 capital gain if those bitcoins were used to purchase an item.

Bitcoin is the most prominent of a number of virtual currencies that have emerged in recent years. The virtual currencies have gained appeal among some for the ability to conduct transactions anonymously or without the oversight of a governmental entity.

The virtual currency has attracted attention and some detractors on Capitol Hill.

Sen. Tom Carper, head of the Homeland Security and Governmental Affairs Committee, praised the IRS Tuesday for releasing the guidance, saying it would give investors in virtual currencies a roadmap for complying with U.S. tax laws.

“It’s tough for people to pay their taxes if they have to guess the amount they owe,” he said in a statement.

But the currency has also been subject to its share of controversy and concerns. For example, the largest bitcoin exchange, Mt. Gox, was forced to declare bankruptcy in February, saying it had lost roughly 850,000 bitcoins, worth at the time over $450 million.

The Japan-based exchange later said it had found 200,000 missing bitcoins.

— Bernie Becker contributed.

— This story was updated at 3:05 p.m. 

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