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?

First, a brief history lesson: 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.

As with anything new, particular in the realm of financial transactions, countries have been forced to implement new rules and regulations to govern this new currency.

How is Bitcoin Taxed?

In 2014, the Internal Revenue Service issued Notice 2014-21, which made clear that Bitcoin is treated as “property”.  Notice 2014-21 can be found here:

However, many issues were not addressed, e.g. how the value cryptocurrency received as income.  After all, if you’ve been paying any attention, you’d know that 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 taxes, including specific guidance aimed to deter tax evasion, among other aspects. 

We will certainly provide updates as these new proposed regulations are issued.  All indicators reflect the desire of the U.S. government to move in favor of more tax, as opposed to less, while some countries, such as Singapore, have proposed exempting Bitcoin altogether from is Value-Added Tax.

In the meantime, here’s a fairly recent article featured on Forbes’ website explaining taxation basics of Bitcoin, providing comparisons with other assets: