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IRS to treat Bitcoin as property, not currency

The IRS may have just taken some of the fun out of bitcoin. But that may mean that the virtual currency is growing up.

The IRS announced Tuesday that it would treat bitcoin, the computer-driven online money system, as property rather than currency for tax purposes, a move that forces users who have grown accustomed to operating under the government’s radar to deal with new tax issues and reporting requirements.

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While that may seem like an expensive headache for some, some financial experts view the move as a way to push bitcoin further away from the fringes and into the mainstream financial system.

“It’s getting legitimacy, which it didn’t have previously,” said Ajay Vinze, the associate dean at the W.P. Carey School of Business at Arizona State University. “I think this ruling, what it does, is it puts bitcoin on a track to becoming a true financial asset.”

While many users already treat bitcoin like a currency, the IRS made it very clear that “it does not have legal tender status in any jurisdiction.”

The industry had been expecting the government to come out with some sort of guidance on bitcoin, so the announcement Tuesday did not come as much of a surprise. But some users worry that treating it as an investment could discourage the use of bitcoin as a payment method. If a user buys a product or service with bitcoin, for example, the IRS will expect the individual to calculate the change in value from the date the user acquired bitcoin to the date it was spent. That would give the person a basis to calculate the gains — or losses — on what the IRS is now calling property.

The IRS’s decision would treat bitcoin as property subject to capital gains taxes. Long-term capital gains taxes are capped at 20 percent, a more favorable rate than the top rate of 39.6 percent on federal income taxes. Individual traders in the currency markets — the British pound, for example — are expected to treat gains or losses as regular income for tax purposes.

“From a tax perspective, this is really the best possible outcome,” said Barry Silbert, the chief executive of SecondMarket, which is planning to introduce a new bitcoin exchange.

Up until now, bitcoin enthusiasts have been able to buy, sell, and trade on their gains with few fees and little oversight, since the currency has no central bank and no government regulator. The price of bitcoin has also fluctuated wildly, from just a few cents to more than $1,000 to its current price of nearly $600. At the same time, an increasing number of merchants, including Virgin Galactic and Overstock.com, have begun accepting bitcoin.

The new guidelines also mean that online exchanges that buy and sell bitcoin (think Charles Schwab for the virtual currency world) will now have to provide customers with annual reports of their transactions, just as stock brokerages and other investment firms do.

Bitcoin has attracted many of its users precisely because it operated outside the established financial system and offered the promise of cheaper transactions. But many advocates have said that regulation is necessary to make bitcoin a viable currency.

The few employers who pay in bitcoin will have to report those wages just like any other payment made with property, and bitcoin income will be subject to the normal federal income withholding and payroll taxes, the IRS said.

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