IRS to Tax Bitcoins and Other Virtual Currencies Like Property, Not Currency

Virtual currencies are becoming more and more popular and tax authorities throughout the world are considering how to handle them.

A recent statement by the American tax authorities provides clarity to the situation, and accords with current Canadian policies.

Bitcoins are the most common form of virtual currency today. Following the recent collapse of the largest Bitcoin server Mt. Gox however, where over $650 million worth of the virtual currency disappeared following the “bankruptcy” of the server, the need for a consistent policy was highlighted.

In a recently released statement, the Internal Revenue Service (IRS) in the United States said, "general tax principles that apply to property transactions apply to transactions using virtual currency". Therefore, depending on the circumstance, Bitcoins are to be taxed as ordinary income or as assets subject to capital gains taxes.

This recent statement by the IRS puts the United States taxing authority in line with the Canada Revenue Agency (CRA).  The CRA does not treat virtual currencies like real currency either; it treats any exchange involving virtual currencies as bartering transactions. Bartering transactions still have tax consequences in Canada.  

Therefore, the tax treatment of Bitcoins and other virtual currencies depends on the conduct and intentions of the taxpayer and the well-developed case law in this regard will be relevant to these determinations. If the taxpayer is objectively involved in a business enterprise, then income and losses will be treated like regular income. If the virtual currency is being held and traded – as investments typically are – then they will be taxed as capital property; long established common law principles that distinguish income from capital gains will apply to these determinations.

If you have been using virtual currencies without reporting the income derived therefrom you should consider the CRA’s Voluntary Disclosure Program.

Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.