Will Bitcoins still be fun if you have to pay taxes on them? Photographer: Philippe Lopez/AFP/Getty Images
Will Bitcoins still be fun if you have to pay taxes on them? Photographer: Philippe Lopez/AFP/Getty Images

The Internal Revenue Service has decided that Bitcoins are more like shares of a tech company than the money in your checking account, at least when it comes to taxes. Anyone who spends Bitcoins (or Dogecoins, for that matter) will now need to pay capital-gains taxes based on the difference between the value of the coins at the time they were acquired and their value at the time of the transaction.

That's different from the way other paper currencies are treated. If you find someone in the U.S. who accepts paper euros or yen and uses that currency to purchase goods and services you don't really need to worry about changes in exchange rates for tax purposes. (Here is the relevant section of the tax code, which says that "personal transactions" are exempt from many of the standard taxes on currency gains as long as the gains are less than $200.)

The Rise of Bitcoin

There is some precedent for treating Bitcoins as property rather than currency: the government's existing standard for transactions involving precious metals, even when those metals are being used as to purchase goods and services rather than as speculative investment vehicles. This penalizes people who want to protect themselves from inflation (the tax code also discriminates against holders of U.S. Treasury inflation-protected securities), but at least it's consistent.

The other defense of the IRS's position is that Bitcoins really are more like equity than currency. Bitcoin bulls who aren't eagerly awaiting the imminent collapse of the global financial system think that the technology has a lot of potential as a payments system. Handling transactions is currently one of the most profitable activities banks do these days, so Bitcoin enthusiasts are rational for wanting to break the lock banks have on this business. For purposes of clearing payments, most people wouldn't hold Bitcoins for more than a few seconds. That would obviate concerns about taxes, since most almost no one would make significant gains in such a short time.

Other people are making a long-term bet on the future of a different kind of payments system. If that bet pays off, a lot of money will be made. If the bet doesn't pay off (maybe a rival currency using similar technology becomes more popular), people who held Bitcoins would be stuck with something worthless. Assuming that kind of risk is qualitatively different from the kind you have if you live near Niagara Falls and hold Canadian dollars for all those times you want to go over the border. Bitcoin holders expect higher returns and are willing to accept greater losses. Taxing them accordingly seems pretty fair.

To contact the writer of this article: Matthew C. Klein at mklein62@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.