Frequently referred to as a “virtual currency” according to the Internal Revenue Service (IRS), the proper name for Bitcoin may just be “virtual property.”

On March 25, the IRS announced that it would treat Bitcoin as “property” for tax purposes. That means virtual currency holders who have not previously reported their Bitcoin holdings will have new hoops to jump through come tax season.

Some believe that this will create headaches for Bitcoin users and possibly discourage the virtual currency’s growth. Under the new IRS regulations, Bitcoin users will now be expected to perform calculations to determine the change in value from when the currency was “acquired” to when it was “spent.” That way, the IRS can calculate gains or losses on the “property” that is subject to long-term capital gains taxes.

According to the New York Times, however, some others believe that this IRS decision could possibly signal mainstream acceptance for Bitcoin.

“It’s getting legitimacy, which it didn’t have previously,” said Ajay Vinze, the associate dean at Arizona State University‘s business school, told the NYT. The ruling “puts Bitcoin on a track to becoming a true financial asset.”

Others believe that calling Bitcoin property rather than currency will ultimately help those who can navigate the tricky tax waters. Long-term capital gains taxes are capped at 20 percent, while federal income taxes can be taxed as much as 39.6 percent. In this way, Bitcoin traders will likely receive a better tax rate than gains or losses made by those in individual currency markets.

Barry Silbert, the chief executive of SecondMarket, which is planning on introducing a new Bitcoin exchange, told the NYT, “From a tax perspective, this is really the best possible outcome.”

So what does this mean for in-house counsel? If your company is planning on introducing Bitcoin as a viable payment option, it means working with accounting to follow the specifics of the IRS’s wishes. All Bitcoin exchanges, both acquisitions and expenditures, should be recorded the same way as property acquisitions and expenditures in order to be compliant with IRS rules.


For more on the growing noise around Bitcoin regulation, check out these InsideCounsel articles:

Treasury Department undersecretary says bitcoin regulation fine for now

Federal judge freezes Mt. Gox CEO’s assets

Digital currency exchange Mt. Gox files for U.S. bankruptcy protection

Debate about bitcoin regulation goes global