Bitcoin as Currency

gty_bitcoin_mi_130322_wgBitcoin is commonly referred to as a crypto currency. This puts it in a category with several other projects that are attempting to achieve similar goals. The basic idea is to use cryptography, or what basically amounts to very complicated mathematics, to allow people to control the use of their funds. This makes it possible for someone to maintain control of their share without having to rely on putting their name on an account or having some kind of centralized authority keeping track of what they owe. When it comes to other situations, though, you should keep in mind that what counts as a currency can be difficult to untangle.

Whether it’s legally currency or something else altogether depends on what country you’re looking at, and even when you check. In some countries, such as Australia, the law specifically says that money is something that’s issued by a national government. Therefore, the law there does not currently leave room for the possibility of declaring it legally a currency, and it has to be handled as property. Likewise, the IRS in the United States ruled in early 2014 that they would treat it as property for tax purposes rather than as a form of money.

It’s not perfectly clear how this works out for people who hold the coins. People who buy them at one price and then sell them at a higher one are likely going to be required to pay capital gains tax. The good news for them is that this tax rate is lower than the one that applies to ordinary income. On the other hand, any spending at all is considered to be a kind of selling. This can mean that someone who goes online to an electronics store to order a keyboard might have to cite that on their taxes, complete with information about both the price at that time and the price when that particular coin was obtained.

Authorities are still working out the details of how it should all work, and they’re being lobbied to accept the idea that these crypto currencies should be treated as money. In the meantime, people handling large quantities of these currencies should be aware that their tax situation could be somewhat complicated, and that it would be smart to seek the advice of professionals to make sure that their tax filings comply with the law.