Most seasoned holders of bitcoin are aware of IRS Notice 2014-21. For those unaware, the notice holds that for US tax purposes, bitcoin is to be treated as property rather than currency. The notice is wrongheaded, foolish and probably was issued with intent to slow down bitcoin adoption. Nonetheless, we’re stuck with it until bitcoin adoption increases to the point where the IRS recognizes it as a currency.
Much ink has been spilled about the more obvious consequences of bitcoin’s classification as property, namely:
- Whenever bitcoin is spent on goods or services, the spender must recognize taxable income or loss on the difference between tax basis (usually the price at which he acquired the bitcoin) and the fair market value of the bitcoin at the time spent.
- Bitcoin miners must recognize ordinary income equal to the fair market value of the bitcoin mined at the time of mining.
- If your employer pays you in bitcoin, such payments must be reported on your W2 and are subject to tax withholding in US dollars.
Beyond these more obvious consequences, however, there are some hidden estate planning traps when it comes to the death or incapacity of a bitcoin account holder. To avoid these problems, here are five