Georgia readers may already know a little bit about bitcoin, a virtual currency created by an anonymous group online. Bitcoin has been in the news a lot lately as mystery and scandal surrounds the buying, selling, and potential theft of the online commodity. However, for most users of bitcoin the concerns at the moment are more practical and are centered around how to assess the proper tax situation of bitcoins for the upcoming April 15th federal income tax filing deadline.

A tax law attorney cannot help Georgia residents to actually file their income tax return. However, they can help answer some of the big tax compliance questions that come along each year when taxpayers are assessing their income, assets, and potential deductions for their federal and state income tax returns.

In the case of filing a tax return when one owns or has owned bitcoins, the question of categorization and tax rate are important aspects of complying with tax laws. Bitcoins occupy some uncharted territory in the United States tax code, since it has declared itself as a currency and is spendable as such for some online retailers, but is not recognized by any sovereign nation at this time. Taxpayers could choose to categorize their bitcoins as foreign currency on a tax return, but the claim may be rejected by the IRS because of the narrow legal definition for a foreign currency.

On the other hand, many people have chosen to consider the bitcoin as an investment for tax purposes and have proceeded to pay capital gains tax on the asset. This strategy seems sensible to many because the capital gains tax rate is relatively low and the definition for a capital asset is somewhat broad.

Source: Business Insider, “Here’s How to File Bitcoin Income on Your Tax Return,” Rob Wile, March 15, 2014.