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Bitcoins Will Be Taxed As Property, Not Currency

That's going to be a bummer for a lot of bitcoin's defenders. And it probably won't help it get more mass adoption.

Posted on March 25, 2014, at 3:27 p.m. ET

Jim Urquhart / Reuters

The U.S. government has finally decided how it will tax bitcoin, and a lot of the cryptocurrency's owners are probably not going to like it.

Bitcoin is going to be treated as a property for tax purposes, which means it will be taxed differently than currencies like the U.S. dollar and the euro.

Here's an example: If a bitcoin owner bought coins when they were at $100 and used them to buy, say, a television for $300, that purchase would trigger $200 in capital gains.

A scenario like that isn't entirely out of the realm of possibility, either, with each bitcoin being valued at $585.53 when the ruling came out and having run up in the past year from around $100. Many online retailers are also beginning to experiment with bitcoin as a method of payment.

In addition, bitcoin "miners" — who use computing power to process transactions and try and uncover additional new bitcoins — will have to record that as gross income for taxation purposes, with the value equal to whatever the coins were worth the day they were mined.

Naturally, this is going to be a bit of a hassle, especially for owners who have used bitcoins for smaller transactions but have made many more transactions. Spending bitcoins regularly over the course of a year could easily add up to having hundreds of reports for the transactions. However, the Internal Revenue Service says "penalty relief" may be available for owners that fail to properly file tax documents for bitcoin transactions due to a "reasonable cause."

Bitcoin has already been facing some problems with mass adoption, most recently with one of bitcoin's largest exchanges Mt. Gox looking for bankruptcy protection and making it impossible to withdraw bitcoins. These extra complications add another layer of hassle and frustration for users of the cryptocurrency.

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