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The Bitcoin Bugle: Derivatives and Taxes

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Those 200,000 bitcoins that Mt. Gox forgot about? Yea, well, they’re still not legal tender, according to the IRS, which will have some unpleasant consequences in about three weeks.

Wading into a murky tax question for the digital age, the U.S. Internal Revenue Service said on Tuesday that virtual currencies such as bitcoin are to be treated, for tax purposes, as property and not as currency….

Virtual currency is not to be treated as legal-tender currency to determine if a transaction causes a foreign currency gain or loss under U.S. tax law, the IRS said….

If a taxpayer holds virtual currency as a capital asset - like stocks or bonds or other investment property - gains or losses are realized as capital gains or losses, the agency said.

Where virtual currency is not held as a capital asset, but rather as inventory or other property mainly for sale to customers in a trade or business, ordinary gains or losses are generally incurred, the IRS said….

"This is going to be unfavorable to bitcoin miners because they're going to have to include in income the fair market value of the virtual currency on the date they mined it," said William Lewis, a lawyer in Sunnyvale, California, who represents a start-up company creating a platform for virtual currencies.

"It's going to make life difficult for a lot of people who have been mining over the past year, who have to go back and see what the values were on those dates when they mined it.”

Here’s one good way to convince the taxman that your bitcoins are a capital asset, aside from, you know, not buying pizza or Sacramento Kings tickets with them.

Tera Group Inc. created a framework for buying and selling swaps linked to Bitcoin that would let investors hedge risk from trading the digital currency.

The firm announced today that it drafted a bilateral agreement that provides a legal template for trading Bitcoin swaps. Tera Group, based in Summit, New Jersey, is seeking clearance from the U.S. Commodity Futures Trading Commission so it can begin trading Bitcoin contracts on its swap-execution facility....

Legal agreements like the one Tera Group created can spur derivatives trading by offering investors a template for structuring deals. The overall swaps market was spurred in the 1980s by another framework: the International Swaps & Derivatives Association’s master legal document, which is still in use today for customized trades that can’t be backed by clearinghouses.

Bitcoins taxed as property, not currency, IRS says [Reuters]
Bitcoin Swaps Near Reality as Tera Creates Legal Framework [Bloomberg]
Mt. Gox says it found 200,000 bitcoins in ‘forgotten’ wallet [Reuters]