Certainly, the IRS will find a way to tax bitcoin.

Recently, the Service issued a statement to the Wall Street Journal saying: “The IRS continues to study virtual currencies and intends to provide some guidance on the tax consequences” of transactions involving them. The agency is also “aware of the potential tax compliance risks posed by virtual currencies.”

Bitcoin could be considered property, foreign currency, barter, or a financial instrument and the IRS has not yet ruled how it will be treated yet.

To oversimplify a little bit, there are two main ways that the IRS will treat Bitcoin: (1) as a capital asset (like stock); or (2) like a currency.

If the IRS treats Bitcoin like a capital asset, then long-term capital gains and losses would qualify for the lower capital gains rate of a maximum 24% (rather than the higher ordinary income rate). However, losses above $3,000 could only be deducted against other capital gains.

If the IRS treats Bitcoin like a currency then any increase in value would be taxed as ordinary income (and ordinary income rates can be as high as 43.4%).

The Winkelvoss Twins’ (indeed, the very same famous Facebook litigants), launched their Winkelvoss Bitcoin Trust and decided that they will count their increases as capital gains until the IRS rules otherwise.

The other question Bitcoin poses is whether cybercurrencies are a “super tax haven.”  The issue is that since most Bitcoin transactions are not on the tax radar, and don’t have associated 1099s, do people need to count Bitcoin transactions?  The IRS says you must report any income on your return regardless of whether you received a Form 1099.

For any questions about Bitcoin or taxable events contact the Gilbert Bradshaw of the Bradshaw Law Group at gil@bradshawlawgroup.com.