Demand for Bitcoins, a completely anonymous digital currency that can be used like real cash, has never been higher.
The so-called "crypto currency" is now valued at $115 USD –– triple what it was at the beginning of March. Analysts have likened its rise in value to the ebb and flow of finite commodities like gold.
At this point, there hasn't been any real enforcement of federal tax laws on Bitcoin users for one simple reason: Until recently, they weren't worth much.
Now that a "Block" of Bitcoins is valued at more than $2,500 today (with its value only rising), there's a good chance Uncle Sam could finally start to take notice.
Opponents of that conclusion will argue that Bitcoins aren't recognized anywhere as legal currency but online. No federal government backs them and anyone who owns them isn't protected if the coins are "lost" or stolen. And if the U.S. government doesn't recognize Bitcoins as legal tender, should Bitcoin miners have to report their stash on their taxes?
The short answer is yes. We reached out to David D. Stewart, an international tax reporter for Tax Analyst who has widely reported on Bitcoin use, to give us the low down.
For casual Bitcoin miners looking to cash in:
Plenty of Bitcoin miners have likely been tempted to sell their coins for cash as the value soared in recent weeks. There are a few online currency exchange sites where Bitcoin holders can trade their coins for a number of different currencies, including U.S. dollars.
Per Stewart, exchanging Bitcoins for cash is a source of income like any other and should be reported on your taxes.
"As soon as you go to exchange them for dollars, you definitely have a tax obligation on that," he said. "There is value in Bitcoins, whether or not people outside the Bitcoin community believe it."
Think of Bitcoins like stock. You wouldn't use your Facebook shares to pay for a new car or your monthly groceries, but you still have to report your investment gains on your taxes. The same goes for a home you've sold at a profit.
For businesses accepting Bitcoins as tender:
While they are few and far between, there are some businesses that accept Bitcoins like any other legal tender. For example, BitBrew.net is a San Antonio, Texas-based business that sells locally sourced coffee beans to Bitcoin holders exclusively.
The owner, who goes by the pseudonym Edd, previously owned a dry cleaning business and told Stewart he treats his Bitcoin cash flow on his taxes the same as he would any other profit.
"It would be the same if you had a business that did transactions in gold or Euros," Stewart explained. "You are receiving something of value in exchange for the goods. In the simplest terms, the value of what you receive less the cost of what you sell is reportable as the profit of the business and is taxable as income to the business owner."
After converting the Bitcoins into U.S. dollars, you would just write it in as part of your revenue.
The bottom line:
Folks hoping to use Bitcoins to skirt tax laws have a couple of things going for them. First, there isn't a simple way to track down individual miners. The system tracks each and every transaction but doesn't divulge miner identities.
Second, like a little kid with a lemonade stand, the IRS isn't going to go after someone who's earning a few extra Bitcoins on the side. Most of the legal attention surrounding Bitcoins has been on the system's propensity to attract money launderers and drug traffickers.
"The system of tracking money is based on banking," Stewart said. "I could transfer $100,000 worth of Bitcoins to someone and no one would know about it really."
Still, that's a gamble we wouldn't recommend taking. Say the IRS drops by for a traditional audit of your taxes. If they dig around and find a stash of Bitcoin revenue you failed to report, you'll only cause more trouble for yourself.
When in doubt, it's wise to consult a tax professional.
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