The rise of bitcoin and other forms of digital currency is fueling a wealth of questions about tax enforcement: what sort of tax treatment guidelines exist for digital currencies? How are tax reporting agencies responding to the large number of digital currencies that now exist worldwide? To what extent is virtual money being used for tax avoidance purposes?

All of this has sparked fervent conversations among those being paid in bitcoin, those simply investing in it, and many of the anarcho-capitalist bent who view taxation as theft. And given prevailing issues around tax havens, offshore accounts, encryption and the Panama Paper revelations, many would argue that prevailing tax monitoring systems are prime for disruption.

In an interview with Bitcoin Magazine, Certified Public Accountant Daniel Winters, addressed ways to make sense of this increasingly complex U.S. taxation landscape. His boutique firm Global Tax Accountants is one of only a handful worldwide that focuses on the tax ramifications of digital currency and blockchain transactions.

Winter's journey to this narrowly defined niche is an interesting one. Hearing about bitcoin's growing popularity in 2013, he ponied up some money and purchased a tiny amount. He became fascinated with Bitcoin's trustless, peer-to-peer system of exchanging value that exists completely outside of the control of central banks or government. Over time he began to explore how this movement might align with his work as a CPA. Later, after reviewing the the guidance issued by the IRS on the taxation of virtual currencies in March of 2014, he elected to pivot his entire accounting practice last year toward the digital currency/blockchain niche  

Today, Daniel has over 30 clients that include investors, contractors and businesses that have bitcoin earnings. He has presented on bitcoin and taxes at the Texas Bitcoin Conference and the New York Bitcoin Center, and was interviewed by Bloomberg regarding New Jersey's tax treatment of bitcoin transactions.  

In the following interview, Winters discusses the road ahead, as U.S. tax authorities and users alike seek to better understand tax policy in the rapidly expanding digital currency landscape.

Is bitcoin considered money for tax purposes?

Per IRS Notice 2014-21, bitcoin is considered a virtual currency and is thus treated as property for federal tax purposes.  In other words, the IRS views bitcoin as being similar to stocks and bonds.  So under federal tax law, if you purchase bitcoin and later sell it, you will have a gain or loss on the transaction.

Bitcoin's designation as a virtual currency connotes its use as a medium of exchange.  And the fact that it is traded on the market determines its value. However, as we know, it is not backed by any sovereign government and is not legal tender anywhere. So it functions as a currency, but only in the virtual world and electronically.

Where was the definition derived from?  

FinCen issued extensive guidance for the defining of digital currency. When the IRS issued their guidance in March 2014, they took the definition of a virtual currency directly from FinCen and then said okay, that is what virtual currency is and how it's defined for tax purposes. Again the big takeaway from the IRS guidance is that bitcoin for tax purposes is property, not currency.