Now that we’ve just about finished arguing whether Bitcoin is a legitimate payment form or not, we’re faced with a whole new set of questions regarding the crypto-currency. One of the most prevalent, confusing, and contested topics is how Bitcoin can and will be taxed. In short, is Bitcoin a currency or a capital asset?
Will Bitcoin be taxed as a currency or a capital asset? Image: Shutterstock via venturebeat.com
While the Internal Revenue Service remains noticeably silent, other countries have been quicker to the mark, adding to the speculation and frustration of investors in the U.S.
Here’s a rundown of what other countries are doing, and why the classification matters.
Last year, Germany took a stand and ruled that bitcoins fall into the category of personal money, meaning that “purchases are subject to sales tax” and users will be required to pay capital gains.
Slovenia says Bitcoin is neither a monetary asset, nor a financial instrument, but that taxation will be reviewed on an individual basis (to determine whether income tax applies).
Singapore, where capital gains are not taxed, recognizes Bitcoin as a product, and will apply the goods and services tax.
In the past week, Finland decided that Bitcoin must be a commodity, after finding that it did not fit legal definitions of a currency or an electronic payment form.
Her Majesty’s Revenue and Customs (HMRC), the tax authorities in the UK, are right now looking to change the classification of virtual currencies from a tradable voucher to a private currency. Though it is not yet official, handling Bitcoin as though it is private money means a value added tax would apply to commissions charged on exchanges, while still making it subject to capital gains taxes.
Though speculators seem to think that the IRS will eventually lean toward a capital gains classification, an income tax ruling could have bigger implications.
If treated under capital gains rules, the same that are used against stocks or commodities, taxes up to 24% may apply, depending on the tax bracket. If the IRS decides that Bitcoin falls into the category of currency, gains would be taxed like income and the rate could go as high as 43.4%. The government’s final decision could mean a difference of more than 20% for taxpayers.
In the absence of any clear direction, Bitcoin users in the U.S. are left without much more course of action than to just watch and wait.
