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If you’ve made a fortune in bitcoins over the past year and think you can shield the gain from the tax man, you may be in for a rude shock: Tax authorities around the world have been closely studying the virtual currency, which in some cases is much less anonymous and untraceable than it might seem.
Even if you’re willing to pay your fair share of your bitcoin earnings, prepare for some headaches. Bitcoin’s popularity has run well ahead of tax law, mostly because nobody can seem to decide what exactly bitcoins should be: A currency, like a dollar or a euro? A financial instrument like a stock or a bond? Or illegal altogether?
The Inland Revenue Authority of Singapore (IRAS) thinks it found a workable way to bring bitcoins in from the cold. In a response to the bitcoin brokerage Coin Republic, as reported by CoinDesk’s Jon Southurst, IRAS says it will treat bitcoins like a product—no different than an iPhone or an MP3 or a shrink-wrapped piece of software—which incurs taxes when it is sold for cash or used to pay for goods or services:
The IRAS reminded Coin Republic that bitcoins do not fit the definition of ‘money’ or ‘currency’, so supplying them is seen as a good/service for taxation purposes rather than a currency exchange.
The tax treatment is slightly different for companies or individuals that buy bitcoins as part of a long-term investment, and then sell them at a higher price at a later date. In that case the proceeds would be treated as a capital gain, which Singapore does not tax.
“As a regional financial services hub and IT center, Singapore could provide a useful model for authorities in other countries to follow,” CoinDesk notes. And therein lies the rub: Governments all over the world are trying to figure out how to handle bitcoins. Germany has defined them as “private money” and a “financial instrument,” China has strongly discouraged companies from using bitcoins, India is trying to figure out how to tax bitcoin miners, and the US Congress thinks that bitcoin’s very existence might violate a Civil War era postal law.
In the meantime, as University of Florida law professor Omri Marian told the Wall Street Journal, “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.” And even though bitcoin is nominally anonymous, real world considerations often make it easy to pierce that veil, and a permanent log of transactions is built into bitcoins themselves. The virtual currency may not last forever, but the tax liabilities it triggers probably will.
Correction (Jan. 9, 2014): An earlier version of this article incorrectly cited Coinbase for a report on Singapore’s tax treatment of bitcoins. It has been changed to CoinDesk.