Here Comes the Bitcoin Taxman

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Bitcoin has generated a lot of buzz because of its ingenuous design, but how widespread its use will become has just as much to do with government policy as any of the virtual currency’s inherent qualities.

Bitcoin prices, for instance, plunged in December following a decision by the Chinese central bank to ban financial institutions from transacting in the virtual currency. The latest government actions to effect Bitcoin, however, deal with how tax authorities will treat it.

According to a report in Bloomberg, the Swedish government is “set to reject Bitcoin and its competitors as a currency and instead give the software the same tax treatment it would an antique Persian rug or a painting by Andy Warhol.” That follows a decision by the Finnish government to treat Bitcoin as a commodity for tax purposes, rather than a currency.

The IRS has yet to weight in on how U.S. taxpayers should treat their bitcoin holdings and transactions as they prepare to file 2013 taxes, leaving many scratching their heads as to how much they owe the government. Jonathan Horn, a certified public accountant in New York told the Wall Street Journal, “If you take a reasonable position, they probably will accept it,” with regards to treating bitcoin like a currency, commodity, or asset.

But when the IRS does eventual rule on how to treat bitcoins, it will have big implications for their popularity. Currency gains, for instance, are taxed at a higher rate than capital gains in assets like stocks. Furthermore, if the IRS agrees with Sweden that bitcoin is an asset rather than a currency, it will force users to deal with complicated tax rules associated with bartering. This would certainly dissuade some businesses from accepting the currency who don’t want to deal with the record keeping and other headaches associated with bartering.