David Smith for Benzinga
On Tuesday, the U.S. Internal Revenue Service issued a notice, informing Americans of the U.S. Federal tax implications of bitcoin transactions. Bitcoin owners and prospective bitcoin owners should take five minutes to read the six-page notice.
For the most part, Bitcoin owners were pleasantly surprised by the news. Anyone who researched the topic or spoke with a knowledgable accountant understood bitcoin gains would need to be reported at tax time. It was expected they would be treated as property, which is how the IRS guidance ended up dealing with bitcoins.
Bitcoiners expected clarification at some point, but not before this year's tax filing deadline.
This clarification is good news for three reasons.
First, it clears up the tax environment. Prior to this announcement, some potential bitcoin investors were concerned it might be illegal. Others thought it was legal, but didn't want to risk getting in trouble with the IRS by making a mistake on their taxes.
This announcement, however, demonstrates that bitcoin is a legal financial investment, and provides certainty as to the way transactions should be reported. Before this announcement there was mostly guesswork as to how the IRS would classify bitcoin transactions. No one likes guessing when it comes to tax penalties, and this guidance removes that guesswork.
The second reason this is good news: this is one of the best possible outcomes. If bitcoin had been classified as a currency instead of property, that would have resulted in a higher tax liability for many bitcoiners -- since those gains or losses are classified as ordinary income or loss. With Tuesday's IRS ruling, bitcoin investors can further benefit from the U.S. long-term capital gain rate, in addition to their investment's massive appreciation.
Lastly, this is good news is because, with this announcement, the IRS at least recognizes the legality of bitcoin -- if not tacitly endorsing bitcoin by stating “Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” For some that is a big deal.
Not many people love the IRS. However most people respect the agency, and its recognition that bitcoin has utility is a win in the battle to eliminate the myth that “bitcoin is a mirage.”
Disclosure: At the time of this writing David Smith has a long bitcoin position.