US Internal Revenue Service to treat Bitcoin as a form of property for tax

The US Internal Revenue Service says it would treat Bitcoin as a form of property for tax purposes, rather than as currency, which would be subject to similar rules as stocks and barter transactions, IDG News service reported.

The new rules announced Tuesday might be good news for investors, as any gains they made from buying bitcoins would be treated as capital gains, which could mean lower tax rates. However, they could also mean that people who spent bitcoins for buying goods and services would need to keep detailed records of those transactions.

That was because they would need to figure out any gains they made. Bloomberg noted, for example, if a person bought a $2 cup of coffee with bitcoins they originally bought for only $1, they would possibly need to report the $1 they made as a capital gain.

The guidance for Bitcoin and other virtual currencies came in a 6-page document on IRS' website Tuesday and comes shortly before the 15 April deadline for filing tax returns in the US.

"For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency," the IRS said.

The IRS, had to choose between treating Bitcoins like currency or property, and its decision could see the volume of transactions conducted with the virtual currency decrease, according to Pamir Gelenbe, a venture partner at Hummingbird Ventures, which invests in technology businesses, Bloomberg reported.

He said it was challenging if one had to think about capital gains before buying a cup of coffee.

Bloomberg quoted Charles Allen, chief executive officer of BitcoinShop Inc, an online marketplace, as saying he would like to see the IRS reconsider its decision as virtual currencies developed.

He added, the implications of the decision on the Bitcoin ecosystem were far reaching, and would be burdensome for both individual users of Bitcoins, Bitcoin-focused business and for the general adoption of virtual currencies. He added that Bitcoin users would adapt to the rules.