Did the bitcoin party just end in the U.S.?

If you were using the digital currency to avoid paying Uncle Sam capital gains on investments, then you bet.

In its first ruling on bitcoin, the IRS has done the inevitable and clarified how it will be taxing the increasingly popular form of electronic money. It said today the U.S. government will treat Bitcoin as property for tax purposes.

Under the ruling, the IRS says that bitcoin investors will be treated like stock investors, so if you hold on to the currency for more than a year, you’ll be taxed at a lower rate, or 23.8 percent. If you flip the currency faster, investors will have to pay 43.4 percent, according to Bloomberg.

Bloomberg explained: If you purchase a $2 cup of coffee with bitcoin bought for $1, it would trigger $1 in capital gains for the coffee drinker and $2 of income for the coffee shop.

Up until now, one of the advantages of bitcoin was the lack of formality around it.

Unlike credit cards, which take a large slice of every transaction, there are no fees. And, there are no charge backs, which save retailers from having to pay for costly disputes. Although this unregulated mindset has also backfired at times with the currency being banned in some countries, and one of its largest exchanges, Mt. Gox, going under after being hacked.

The good news is that the IRS will also allow taxpayers to subtract capital losses from any capital gains when losses are made on the investments. But unfortunately, the rules take effect immediately, and be retroactive, meaning that they will cover any past and future transactions.

You have until April 15 to figure out what these new rules mean to you.


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