The start of every calendar year brings the same trouble for most of the investors all over the world: filing tax returns. Adding up all possible incomes earned in the year and filing the tax returns is quite troublesome for investors, especially the ones holding Bitcoins. Since, Bitcoins are government independent, the question remains if one should add all Bitcoin related earnings in the year, on the tax return or not. Many might take the anonymous nature of the Bitcoins to an advantage and not file it in their tax returns, expecting to swing by the government unnoticed.
This problem has come into the limelight recently after the astronomical price rise of Bitcoins in the year 2013, which saw a lot of investor gains. Before 2013, the gains from a sluggish Bitcoin market were not significant enough to be reported on the tax return so the Bitcoin tax filing issue never really came into existence. The Internal Revenue Service (IRS) of the US remains silent on the bitcoin tax liability, its representatives state, “The IRS is aware of the potential tax-compliance risks posed by virtual currencies. The IRS continues to study virtual currencies and intends to provide some guidance on the tax consequences of virtual-currency transactions.”
Even if the IRS figures out a way to tax Bitcoin investor gains, the primary question is if the Bitcoin will be treated as a capital asset or not. Capital assets such as the stocks, stock funds and commodities are taxed at a rate of up to 24% and gains from fiat currencies such as the Dollar and Euro, would be taxed at a rate of up to 43%. This puts the IRS in a fix as the tax laws were not written keeping the newly emerged crypto currencies in mind. Since the Bitcoins are usually referred to as virtual currencies, if they are taxed at the rates of fiat currencies, a lot of investors would flee the Bitcoin market as their gains would be largely subsidized. This would also allege some governmental influence.
Even tax accountants in famous tax firms are not able to find a solution to this problem. Recently, one tax professional however gave some clarity on the taxing process and how Bitcoins could be taxed, on reddit.
What the future holds for Bitcoiners with regards to taxes cannot be ignored, considering the increasing investor interest in the financial instrument. Recently, the CEO of Overstock.com revealed that he held Bitcoins worth several millions. The IRS would have to soon come up with a working tax formula to tax such huge investors at the least. It would be worthwhile to watch IRS’ tax strategies for Bitcoins in the coming days.