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Does IRS guidance dim Bitcoin's luster?

A synonym for the word controversy is dispute. And nothing feeds dispute more than when those involved in an argument can't agree on what it is they are arguing about. Take for example the case of Bitcoin.

Bitcoin has only existed for a few years. Most readers in the Washington area probably don't have anything to do with bitcoin, but most likely know that it is a form of virtual currency that exists in the realm of the World Wide Web.

In the short time it's been around, it has gained popularity as a way to pay for some goods and services. And even though no country recognizes it as legal tender, bitcoin has come to have value in the marketplace. That has challenged the Internal Revenue Service to come up with policy on how to levy taxes.

This week, just ahead of April 15, the IRS declared it intends to treat bitcoin as property, not currency. What that means, analysts say, is that if a Bitcoin user buys something with the currency, the IRS expects the transaction to result in either a capital gain or loss and that will need to be reported for tax purposes.

The calculation of that gain or loss will reportedly involve comparing what the market value of the bitcoin was on the day of the transaction with the value the currency was the day it was acquired.

Some might suggest that such a scenario creates a lot of room for disagreement. And where disagreement exists, conditions are ripe for income tax controversy. When such issues do arise, it's always best to be working with an experienced attorney to achieve the optimal outcome.

Another thing that the analysts seem to agree on is that the IRS guidance regarding bitcoin as property may serve to stifle promoters' dreams of it becoming a general digital currency. As one CPA notes, who wants to figure out what the capital gain or loss is for a cup of coffee bought with bitcoin, or find themselves subject to an IRS audit because of disagreement about it.

Source: Forbes, "IRS Bitcoin Guidance To Chill Its Use," Robart A. Green, March 26, 2014

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