The IRS guidance begins by seemingly accepting that cryptocurrencies are a form of currency, but notes that they are not officially recognized.
“[V]irtual currency operates like real' currency -- i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction,” the IRS said.
So even though cryptocurrencies acts as currency, the IRS is going to tax them like property or assets. Any wages paid in Bitcoin or other digital currencies must be reported as regular income and on W-2 forms. Cryptocurrencies will also be subject to the 20 percent capital gains tax if calculated as gains or losses on capital assets — just like stocks and bonds.
“I am pleased that the IRS is taking this important step to provide clarity for taxpayers regarding the treatment of digital currencies,” Carper said. “As I’ve said before, the implications for digital currency are wide ranging and demand a whole-government approach. Today, we’ve seen a key agency attempt to put one more piece of the puzzle into place.”
But, as digital currency expert Omri Marian told Politico, the new IRS guidance leaves a lot of unanswered questions, including how taxpayers are supposed to determine the price of their cryptocurrencies when the prices fluctuate between exchanges.
“Today for example they varied by $20. Does it mean I have to use the same exchange each time or do I need to pick the highest price for gains and lowest price for losses?” Marian asked.
Marian also said the IRS guidance didn’t say how it would collect taxes from cryptocurrency users who stay off the grid.
“A lot of people who participate in the Bitcoin community do it for the veil of secrecy,” Marian said. “I’m not sure how the IRS is going to enforce it when the identities of people are not known.”
Meanwhile, heavy-handed regulators want to control digital currencies as if they were any other legal tender.
So which is it? Perhaps the federal government should decide how it wants to treat cryptocurrencies before moving forward. It could look to gold as a possible answer.
Germany declared Bitcoin legal tender in 2012 but exempted the digital currency from its capital gains tax. If the U.S. goes a different route, it could cause confusion.
This is yet another example of how the federal government doesn’t understand cryptocurrencies, but is trying to raise revenue off them and control them anyway.