The US Internal Revenue Service (IRS) is set to tax bitcoins and other virtual currencies as property, rather than currency.
In the organisation’s first announcement on the digital medium of exchange, it is applying the same rules it uses to govern stocks – a move that could severely hit the number of transactions made in Bitcoin due to the capital gains tax liability.
IRS said in a statement: "General tax principles that apply to property transactions apply to transactions using virtual currency."
And Bloomberg gave the example that a $2 cup of coffee purchased in Bitcoin would incur a $1 capital gains tax liability for the customer, in addition to the $2 paid to the shop.
In addition, the ruling also means that Bitcoin investors would now be treated as stock investors and any bitcoins held for more than a year and then sold would be levied with lesser tax rates applicable to capital gains.
The Bitcoin market has been in turmoil since the break down of defunct exchange Mt.Gox after an alleged loss of $350m worth of bitcoins due to a flaw in the implementation of the bitcoin protocol.
Once the world’s largest bitcoin exchange, it consequently filed for bankruptcy as its consumers took to the web to claim they had lost massive amounts of cash they had stored with the exchange.
As a consequence the New York Department of Financial Services (NYDFS) has outlined proposals to establish regulated Bitcoin exchanges.
