If you are one of the many individuals who owns bitcoins, or is thinking about buying into the emerging technology, one important thing to note is that the Internal Revenue Service (IRS) does not in fact treat the burgeoning digital currency as a currency.
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“The IRS … treats [bitcoin] as an asset, like stock,” Dave Du Val, chief customer advocacy officer at TaxAudit, told FOX Business.
For tax purposes, virtual currency is treated as property. That’s because, even though “in some environments, virtual currency operates like ‘real’ currency … it does not have legal tender status in any jurisdiction,” according to the IRS.
What does that mean for taxpayers? The taxable portion is the difference between the amount you paid for it and the amount you sold it for. Therefore, Du Val says it is critical that you keep a record of all virtual currency transactions. Without those records, the entire sales price would be taxable.
After the launch of a new CBOE futures trading platform this week, bitcoin surged 6%, before giving back some of those gains on Wednesday. Bitcoin was trading around $16,580 near the end of the day on Wednesday, according to CoinDesk’s bitcoin price index. For the year, the digital currency is up more than 1,500%.
On Wednesday, Federal Reserve Chair Janet Yellen fielded questions about the impact of digital currencies on the economy during her last press conference as head of the central bank. While acknowledging that the Fed is monitoring developments, she said bitcoin does not significantly factor into monetary policy decisions.
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“Bitcoin at this time plays a very small role in the payment system,” she said. “It is not a stable source of value, and it doesn't constitute legal tender. It is a highly speculative asset.”
Major business leaders remain mixed on the significance of cryptocurrencies. While JPMorgan’s (JPM) Jamie Dimon said bitcoin “wasn’t going to work” at an investor conference in September, billionaire investor Peter Thiel told FOX Business last month that the currency was “very underestimated.” Meanwhile, Overstock (OSTK) CEO Patrick Byrne is launching the first fully regulated cryptocurrency exchange.