The Days Of Tax-Free Bitcoin Are Over

Bitcoin, the internet currency that has generated as much confusion as it has excitement, has gained a little more governmental legitimacy — though maybe not the good kind. The IRS has said Bitcoin will be treated as property, and taxed as such. Though the government still doesn't recognize the peer-to-peer payment system as an official currency, the new property classification means that bitcoins will now be subjugated to federal taxes, and will require a reporting system.

This seems to put a damper on the fun associated with the almost make-believe tender, which has historically been used for decidedly unregulated activities like drug and money laundering.

While the bitcoin has been around since 2009, Tuesday's IRS announcement appears to be the first sign of government intervention into the cryptocurrency. The value of a bitcoin is generated in a way that's similar to finding the next prime number: Like gold, prime numbers are increasingly rare and difficult to find. However, rather than a prime number, bitcoin "miners" (people looking for bitcoins) look for data sequences or "blocks" that generate a special pattern, which in turn, generates their value.

The implications of such a development seem to bode well for Bitcoin, which has only been in existence since 2009. The IRS' recognition of the system as "property" seems to be the first step in integrating bitcoins into mainstream currency. According to accounting firm PricewaterhouseCoopers LLP, the current market-value of bitcoins stands at an astounding $8 billion, with 80,000 daily transactions.

And these transactions aren't all for nefarious activities, à la Silk Road. In fact, in December of 2013, a Nashville restaurant became the first in the country to accept bitcoins as payment. In keeping with the cyber-trend, e-commerce platforms are now also embracing the new (not government recognized) currency, with Overstock.com being the first of the major retailers to accept bitcoins as payment.

Of course, as with any government regulation, the property recognition isn't all fun and games. Whereas the previous incentive associated with the bitcoin was the lack of governmental oversight, miners, users, and businesses will now have to deal with the taxes incurred by the cryptocurrency. According to USA Today:

The guidance means that wages paid in Bitcoin are subject to federal income tax withholding and payroll taxes and must be reported on W-2 forms. Businesses that accept Bitcoin for goods and services will be taxed on the fair market value of the Bitcoin payment as part of their gross income, the IRS said. The fair market value would be calculated as the U.S. dollar value on the date payment was received.

Humph. Taxing Bitcoin is a bit of a blow to the happy-go-lucky nature of the currency. Guess the Internet and its monies really aren't all fun and games after all...