Bitcoin has been hugely controversial, with the recent bankruptcy of Bitcoin exchange Mt. Gox raising concerns about the cyber-currency. But guidance earlier this week from the IRS could have an even bigger effect by imposing obligations on Bitcoin users that could be extremely onerous.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, goes through the IRS Bitcoin regulations, noting that the basic idea is that the IRS will treat Bitcoin as property rather than currency. Dan runs through the implications, noting that technically, any transaction involving Bitcoin will create capital gains or losses, and those who mine Bitcoin will have self-employment income on which they'll have to pay payroll taxes like Social Security and Medicare taxes. Moreover, Dan notes that various reporting and withholding obligations will also apply, ranging from payroll-tax withholding for wages to backup withholding and information reporting for other transactions. Dan concludes that with so many people using Bitcoin to avoid exactly this type of bureaucracy, it'll be interesting to see how well the IRS plans to enforce these rules.