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Foreign Tax Law

US Tax Payers – the IRS will fleece now your Bitcoin Wallets!

(Dubai, 26/03/2014) Finally, Virtual Currency (VC) Tax Rules - including the most popular, Bitcoin - came to the US on March 25! Several insiders predicted that the government will probably mandate special VC/Bitcoin Reporting on foreign disclosure forms. So far, a number of other countries have already issued their own tax rules on Bitcoin and related virtual currency transactions. And now the US issued their own, and it came much more worst!

To summarize:

Bitcoin - My PreciousWhile most governments see VC/Bitcoin officially as a kind of ‘currency alternative,’ the IRS of the US doesn't!

  1. According to the IRS, VC/Bitcoin is PROPERTY and should be taxed accordingly - similar to, for example, a piece of rental property or collection of fine wine or a commodity.
  2. This means: the sale of VC/Bitcoins is taxable based on capital gains. A Bitcoin bought at $1 and sold then at $501 several years later would result in the duty to pay long-term capital gains tax on the $500 gain. Currently in the US 23.8%. Or $119.
     
  3. VC/Bitcoins held shorter than 1 year result, instead in capital gains tax, in ordinary income tax rates.
  4. If you mine VC/Bitcoins as a trade/business, the income from the mining activity is in the US not only subject to income tax, but also self-employment tax.
  5. If you trade VC/Bitcoins for some other property that exceeds your cost basis, you are subject to tax!
    This effects amongst others all the ‘Bitcoin millionaires’ out there - early adopters who purchased Bitcoins at $1 or less.

Giving you a thrilling example:
Harry was one of the first Bitcoin adopters and bought 5,000 bitcoins at $0.05 per each. Last year when Bitcoin was valued at roughly $1,000 in paper currency, harry traded 250 of them to realize his personal dream: Buying a brand new Lamborghini. Now comes the IRS and explains Harry: Mr. Harry, you had a cost basis of $12.50 for the traded 250 Bitcoins. You traded them for other property, a brand new Lamborghini. This car has a fair market value of $250,000. In result, you have a taxable gain of $249,987.50. Naturally, we as IRS are happy to go back in time and thrust all sorts of interest and penalties upon you - if you didn’t comply with the law . . . "Failure to timely or correctly report virtual currency transactions when required to do so may be subject to information reporting penalties under section 6721 and 6722".

For all more interested out there: The IRS published a "notice" with a comprehensive Q&A list, which you may download from our website.

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