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What Does The Bitcoin Craze Mean For Taxpayers?

By now you’ve likely heard of the new digital currency that businesses are accepting as a form of payment for their products and services. In fact, there were over $500 million worth of transactions processed with bitcoins in April and that number is slated to increase to $750 million in May. As the market continues to grow, find out what should participants and businesses should know about the tax ramifications for such a currency.

bitcoin-currencyWhat exactly is a bitcoin?
Without getting into all of the technical aspects, it’s essentially a decentralized peer to peer digital currency that is managed by a computer network. Think of gold, except the currency is digital bits. This means that there is little if any processing fees and the currency can be transmitted instantaneously throughout the world for goods and services. There’s actually very little oversight from a regulatory perspective. As you might imagine, it’s gained in popularity since it’s inception, which is partly due to a backlash against big banks.

Are consumers subject to taxes for selling bitcoins?
While it’s difficult for authorities to enforce taxation on transactions executed through bitcoins, the same rules apply as if the dollar was used. If you use bitcoins to purchase a certain good and then sell it with bitcoins, there’s a taxable gain/loss. From a tax perspective, it’s similar to the bartering industry, which the IRS has struggled to oversee for years as substantial taxes are under-reported annually.

Is your business accepting bitcoins?
If so, then you’ll need to convert your bitcoins to dollars for reporting purposes and follow the same regulations you normally do with your business. Again, it’s similar to accepting gold as payment for your goods and services. You need to be careful though as the system is far from full proof and there can certainly be manipulation and bitcoins linked to illegal transactions. It’s fine to accept bitcoins and attract more customers, but it’s at your own risk for now. There’s no insurance or FDIC program in place.

More investment tax questions? Browse answers or ask bitcoin tax questions online.

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