If you don’t know what Bitcoin is, then perhaps this is not the post for you.  Bitcoin is an online currency that can be mined and then traded between online users.  It’s a fairly new concept so that leads to questions about how it is taxed, but really it has a lot of similarities to gummy bears.

The Internal Revenue Code does not contain the word Bitcoin anywhere in it, so there is not exactly one Code section I can point to that has all the answers, but we can still apply the other Code sections to this new online currency.  The tax Code is quite clear that whether you receive cash, Bitcoin, or pounds of gummy bears, if you provide a service or sell a good and you receive something in return, whatever you received is income for you the day you receive it.  By accepting 742 pounds of gummy bears or 16 Bitcoins instead of $1,900 cash, you haven’t avoided taxes.  Income is still income regardless of what form it arrives in.  In that respect, Bitcoin is exactly the same as gummy bears.  The income is calculated the day you receive the Bitcoin, not the day you decide to cash it out. 

The difference between Bitcoin and gummy bears is a question of fair market value.  Although I have enjoyed gummy bears for a long time, I admit I do not know if the gummy bear prices fluctuate on a daily basis; I would assume not.  If you are going to cash out your Bitcoins into currency, that value does fluctuate like a stock price.  As I am writing this, the value is around $119 for 1 Bitcoin.  When you are reading this, the value might be higher or lower; the price of the gummy bears probably hasn’t changed.  So what happens when you provide services in exchange for 10 Bitcoins, you recognize income at the FMV of the Bitcoin when received, and then you cash it out two months later when the FMV has increased?  You picked up $1,190 of income, but now it’s worth $1,400 due to the fluctuations in price.

That’s where it gets tricky, but it would probably be another gain from cashing out.  It’s likely to be considered a currency and since you acquired it for $119 and sold it for $140 there would be a gain to recognize there.  This is the one area where it would be nice for the IRS to issue some guidance, and maybe they will.  Hopefully it will be someday soon.  To keep it simple until then, collect your income in cash or gummy bears.