Bitcoin Taxation

By Kenneth H. Bridges, CPA, PFS     March 2015

At Bridges & Dunn-Rankin, we have not yet started accepting bitcoin for payment of our fees, but it is estimated that over 80,000 businesses do now accept it.

Bitcoin is an online digital currency created in 2009 by an unknown computer programmer (using the alias Satoshi Nakamoto).  Bitcoins are created by “mining”, a process whereby computers are used to solve complex mathematical problems.  “Miners” who successfully solve these problems are rewarded with bitcoins.  Supposedly, there are only 21 million bitcoins which can be mined, meaning that they are finite in their supply.  Unlike the U.S. dollar which is a fiat currency (meaning it is backed by a government), the bitcoin is not backed by any government or bank and no one can be required to accept it as payment.

In 2014, the IRS issued guidance on how bitcoin will be treated for income tax purposes.  The IRS indicated that while “virtual currency” like bitcoin may operate like “real currency” and be accepted as a medium of exchange, it does not have legal tender status and thus will be treated as “property” for income tax purposes.  Accordingly, whenever you exchange bitcoin for other property, you have gain or loss for income tax purposes to the extent the value of the bitcoin (as measured in U.S. dollars) has changed since you acquired the bitcoin (often the case since the value of bitcoin has been very volatile relative to the U.S. dollar).  Unless you are a dealer in bitcoin, gain would likely be a capital gain (short-term or long-term, depending on how long you held the bitcoin).  Loss on the other hand might be nondeductible (if the bitcoin was for personal use) or capital (if the bitcoin was acquired as an investment).

Bitcoin received in exchange for goods or services is treated like the receipt of U.S. dollars (as measured based on the value of bitcoin on the date of receipt).

Similarly, if by chance you are mining for bitcoin and are successful, then you have ordinary income on the date of receipt equal to the value of the bitcoin in U.S. dollars.

It should be noted that, similar to Bridges & Dunn-Rankin, the IRS does not yet accept bitcoin as a method of payment.  The fact that the IRS must accept the U.S. dollar in satisfaction of our tax obligations is part of what gives the U.S. dollar known and stable value.

Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.

This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice.  The article provides only a very general summary of complex rules.  For advice on how these rules may apply to your specific situation, contact a professional tax advisor.