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What kind of tax animal is Bitcoin?

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By now most everyone has heard of Bitcoin. But how should the Bitcoin be treated on your US income tax return? Is Bitcoin taxed as a capital asset or a currency?

If it is treated as a capital asset, like a stock or commodity, than it is a subject of capital gains taxes (up to 24%). However, losses of more than $3,000 could only be used to offset other gains and not ordinary income. Separate rules may apply to professional traders.

If it is treated as a fiat currency, such as dollars, euros and yen, than the gains are taxed like earned income (up to 43%). The losses, however could offset other earned income.

The IRS says it is studying the matter but has yet to issue any guidance. Most taxpayers will simply pick what is most beneficial to them when they file their 2013 returns.

No matter what method you select, you must apply a consistent tax treatment and track your cost basis. Tracking cost basis is not easy at the moment, although Bloomberg has begun publishing prices.

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