04-30-2025, 02:29 PM
#16: What if I'm a "day trader?"
Generally, the tax treatment for day traders is the same as a regular investor. Of course there are exceptions to this rule, such as the mark-to-market regime, but they would not apply to bitcoins without some affirmative directive by the IRS.
There is also the possibility of your day-trading activities rising to the level of an actual business (which would make your gains and losses "ordinary.") The IRS is extremely stingy when it comes to classifying day-traders in this manner, though, so it's unlikely you have anything to worry about here. However, you should consult with a tax advisor to be sure about your status.
#17: What if Bitcoins are classified as a collectible?
As a collectible, the gains would still be "capital gains," but the lower tax rate given to long term capital gains would be fixed at 28% (instead of the 15% most taxpayers would use). However, it's pretty unlikely at this point that bitcoins would be classified as a collectible. First, bitcoins are not specifically named in the code section that defines "collectibles." Second, collectibles are traditionally limited to tangible assets, whereas bitcoins are intangible assets. (Note: there might be an argument that physical bitcoins, such as those made by Casacius, are "collectibles." However, that would still require some declaration by the IRS or Congres to make certain). Thus, for now, it's safe to conclude that bitcoins are not a collectible and regular long-term capital gains treatment applies.Note: IRS Notice 2014-21 is silent as to this issue.
#18: What if bitcoins are treated as a foreign currency?
Edit: IRS Notice 2014-21 clarifies that bitcoins are not a foreign currency.
As a foreign currency, bitcoins would be disqualified from capital gains treatment (even though still technically a capital asset). In other words, all bitcoin gains would be taxable at ordinary income tax rates regardless of holding period. Although this sounds like bad news for bitcoin investors, there are some caveats that arguably outweigh the negatives of this outcome .
The biggest is the exception under the foreign currency rules for "personal transactions." Under this exception, gains of less than $200 are tax free as long as the transaction is not for investment or business purposes. Remember that without this exception, every exchange of bitcoins for goods or services would trigger taxable gain, which creates a significant burden on the use of bitcoin for day-to-day transactions. Thus, this exception is a potential game changer for the future of bitcoin. Assuming that most consumer transactions would generate less than $200 of gain, there would be no tax consequences to the use of bitcoin for personal spending. The implications of this outcome cannot be overstated.
If the gains are greater than $200 (on personal transactions), they are no longer tax free. However, instead of being taxed as ordinary income, the code allows them to be treated as capital gains instead. Thus, the gains would be eligible for the lower tax rate given to long-term capital gains . Although not as significant as the $200 exemption mentioned above, this still offers a benefit to consumers who use bitcoin for day-to-day personal transactions.
Just to be clear, any gains on non-personal transactions would be ordinary income. So, investors would lose the lower tax rate given to long-term capital gains. However, this isn't as bad as it sounds. First, many investors - particularly day traders - do not hold bitcoin for longer than one-year anyways, so their tax rate is effectively unchanged. Second, because they are no longer "capital," bitcoin losses would be fully deductible (i.e. not subject to the $3,000 limitation discussed below). Finally, investors stand to benefit indirectly from the $200 exemption mentioned above. That is because this exemption should help propel the wide spread use of bitcoin, is likely to be the greatest catalyst for future market appreciation.
#19: So, are bitcoins foreign currency?Edit: IRS Notice 2014-21 clarifies that bitcoins are not a foreign currency.
It is impossible to say at this point whether bitcoins are a foreign currency for purposes of income taxation. No US court has directly addressed this issue, nor has the IRS published any guidance . The closest we've come is an obscure federal court decision written by a Magistrate judge involving bank fraud chargers (which has nothing to do with taxation) and a ruling by FinCen that bitcoin is not a currency. However, the FinCen ruling uses an extremely narrow definition of currency that has no application whatsoever to the issue of taxation.
Thus, bitcoin users and tax professionals are left to guess as to it's proper classification. The conservative approach is to treat bitcoin as a normal capital asset until some further guidance is issued by the IRS. This is consistent with the general attitude towards bitcoin expressed by the IRS, as well as some notable legal scholarship on the issue. When dealing with uncertainties such as this, it is generally advisable to proceed with the most cautious option available, which would be treating bitcoin as a capital asset (not a foreign currency).
This is not to say that you would be without a basis for treating bitcoin as a foreign currency. Indeed, bitcoins are intended to serve as a medium exchange and lack any other functional purpose. Unlike gold, silver or other commodities that have served as currency in the past, bitcoins do not have any industrial or commercial usefulness aside from exchange. This arguably makes them much more similar to a currency than a commodity or other capital asset.
Of course, the fact that bitcoins are not minted by any foreign government or bank casts some doubt as to whether they are truly foreign. However, the internal revenue code does not employ the term foreign currency. It distinguishes currency as being functional or nonfunctional. Further, it declares that only the US dollar can be a functional currency. Thus, the fact that bitcoin is not produced by a foreign government is not actually relevant, because any currency that is not the US dollar is automatically a non-functional currency and therefore subject to the foreign currency rules.
In the end, the decision of whether to treat bitcoins as a foreign currency is up to you (and your tax advisor). The trouble is that the IRS could subsequently try to undo your elected treatment and assess the additional tax that would result. Of course, it's possible that the IRS will ultimately agree with your treatment of bitcoin as a foreign currency, in which case you would not be at any risk by adopting the treatment early. I wish I could provide a more concrete recommendation here, but at this point it's just too uncertain.
Tl; DR:Your gains are most likely characterized as "capital gains." If bitcoins are determined to be a foreign currency, the characterization would be different. Additionally, there are other exceptions that might apply (particularly if you are a bitcoin miner or a very active day trader).
Generally, the tax treatment for day traders is the same as a regular investor. Of course there are exceptions to this rule, such as the mark-to-market regime, but they would not apply to bitcoins without some affirmative directive by the IRS.
There is also the possibility of your day-trading activities rising to the level of an actual business (which would make your gains and losses "ordinary.") The IRS is extremely stingy when it comes to classifying day-traders in this manner, though, so it's unlikely you have anything to worry about here. However, you should consult with a tax advisor to be sure about your status.
#17: What if Bitcoins are classified as a collectible?
As a collectible, the gains would still be "capital gains," but the lower tax rate given to long term capital gains would be fixed at 28% (instead of the 15% most taxpayers would use). However, it's pretty unlikely at this point that bitcoins would be classified as a collectible. First, bitcoins are not specifically named in the code section that defines "collectibles." Second, collectibles are traditionally limited to tangible assets, whereas bitcoins are intangible assets. (Note: there might be an argument that physical bitcoins, such as those made by Casacius, are "collectibles." However, that would still require some declaration by the IRS or Congres to make certain). Thus, for now, it's safe to conclude that bitcoins are not a collectible and regular long-term capital gains treatment applies.Note: IRS Notice 2014-21 is silent as to this issue.
#18: What if bitcoins are treated as a foreign currency?
Edit: IRS Notice 2014-21 clarifies that bitcoins are not a foreign currency.
As a foreign currency, bitcoins would be disqualified from capital gains treatment (even though still technically a capital asset). In other words, all bitcoin gains would be taxable at ordinary income tax rates regardless of holding period. Although this sounds like bad news for bitcoin investors, there are some caveats that arguably outweigh the negatives of this outcome .
The biggest is the exception under the foreign currency rules for "personal transactions." Under this exception, gains of less than $200 are tax free as long as the transaction is not for investment or business purposes. Remember that without this exception, every exchange of bitcoins for goods or services would trigger taxable gain, which creates a significant burden on the use of bitcoin for day-to-day transactions. Thus, this exception is a potential game changer for the future of bitcoin. Assuming that most consumer transactions would generate less than $200 of gain, there would be no tax consequences to the use of bitcoin for personal spending. The implications of this outcome cannot be overstated.
If the gains are greater than $200 (on personal transactions), they are no longer tax free. However, instead of being taxed as ordinary income, the code allows them to be treated as capital gains instead. Thus, the gains would be eligible for the lower tax rate given to long-term capital gains . Although not as significant as the $200 exemption mentioned above, this still offers a benefit to consumers who use bitcoin for day-to-day personal transactions.
Just to be clear, any gains on non-personal transactions would be ordinary income. So, investors would lose the lower tax rate given to long-term capital gains. However, this isn't as bad as it sounds. First, many investors - particularly day traders - do not hold bitcoin for longer than one-year anyways, so their tax rate is effectively unchanged. Second, because they are no longer "capital," bitcoin losses would be fully deductible (i.e. not subject to the $3,000 limitation discussed below). Finally, investors stand to benefit indirectly from the $200 exemption mentioned above. That is because this exemption should help propel the wide spread use of bitcoin, is likely to be the greatest catalyst for future market appreciation.
#19: So, are bitcoins foreign currency?Edit: IRS Notice 2014-21 clarifies that bitcoins are not a foreign currency.
It is impossible to say at this point whether bitcoins are a foreign currency for purposes of income taxation. No US court has directly addressed this issue, nor has the IRS published any guidance . The closest we've come is an obscure federal court decision written by a Magistrate judge involving bank fraud chargers (which has nothing to do with taxation) and a ruling by FinCen that bitcoin is not a currency. However, the FinCen ruling uses an extremely narrow definition of currency that has no application whatsoever to the issue of taxation.
Thus, bitcoin users and tax professionals are left to guess as to it's proper classification. The conservative approach is to treat bitcoin as a normal capital asset until some further guidance is issued by the IRS. This is consistent with the general attitude towards bitcoin expressed by the IRS, as well as some notable legal scholarship on the issue. When dealing with uncertainties such as this, it is generally advisable to proceed with the most cautious option available, which would be treating bitcoin as a capital asset (not a foreign currency).
This is not to say that you would be without a basis for treating bitcoin as a foreign currency. Indeed, bitcoins are intended to serve as a medium exchange and lack any other functional purpose. Unlike gold, silver or other commodities that have served as currency in the past, bitcoins do not have any industrial or commercial usefulness aside from exchange. This arguably makes them much more similar to a currency than a commodity or other capital asset.
Of course, the fact that bitcoins are not minted by any foreign government or bank casts some doubt as to whether they are truly foreign. However, the internal revenue code does not employ the term foreign currency. It distinguishes currency as being functional or nonfunctional. Further, it declares that only the US dollar can be a functional currency. Thus, the fact that bitcoin is not produced by a foreign government is not actually relevant, because any currency that is not the US dollar is automatically a non-functional currency and therefore subject to the foreign currency rules.
In the end, the decision of whether to treat bitcoins as a foreign currency is up to you (and your tax advisor). The trouble is that the IRS could subsequently try to undo your elected treatment and assess the additional tax that would result. Of course, it's possible that the IRS will ultimately agree with your treatment of bitcoin as a foreign currency, in which case you would not be at any risk by adopting the treatment early. I wish I could provide a more concrete recommendation here, but at this point it's just too uncertain.
Tl; DR:Your gains are most likely characterized as "capital gains." If bitcoins are determined to be a foreign currency, the characterization would be different. Additionally, there are other exceptions that might apply (particularly if you are a bitcoin miner or a very active day trader).