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The IRS Remains Unclear on Bitcoin

With bitcoin's phenomenal success this year, many are left to wonder how the virtual currency will be taxed. Released in 2009 by an unknown person or group known only by Satoshi Nakamoto, bitcoin is the most prominent of several "virtual currencies," and is maintained by a decentralized network of computers called "miners." These miners process and verify transactions. All bitcoins in circulation are estimated to be worth a total of $8 billion, according to CoinDesk.

Bitcoin has risen from $13.50 earlier in the year to a high of $1200 in November. U.S. taxpayers holding the virtual currency are asking a host of questions to which no one has been able to answer. "People who invested in bitcoin or used it to buy goods or services this year have gains or losses, but no rules for reporting them," says Omri Marian, a professor of law at the University of Florida in Gainesville. "What should they do in April?"

So far, the IRS has been less than clear on such issues. An agency spokesman released the following statement: "The IRS continues to study virtual currencies and intends to provide some guidance on the tax consequences" of transactions involving them. The agency also stated that they are "aware of the potential tax compliance risks posed by virtual currencies."

Bitcoin has the potential to create massive headaches for the IRS, so it's no wonder an official statement hasn't been given. Many financial advisers are playing it in the safe side, advising their clients to report all bitcoin income, gains and losses to the IRS.

Jonathan Horn, a certified public accountant in New York plans to advise his clients to file foreign account disclosures if they meet certain thresholds and hold bitcoin through an entity that isn't located in the U.S. He believes that "if you take a reasonable position, they probably will accept it."

Mr. Horn warns that taxpayers who have bitcoin and attempt to withhold that information from the IRS "are opening themselves to penalties, interest and possible fraud prosecution." When it comes to taxes, better safe than sorry.

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