Are Bitcoins a Capital Asset?

By January 8, 2014 January 20th, 2014 Investors

 

Yes, bitcoin and other cryptocurrencies are probably a capital asset.  Under Sec. 1221(a) of the income tax code, a capital asset is anything that is not:

  • Inventory or property held by the taxpayer primarily for the sale to customers in the ordinary course of his trade or business
  • Depreciable property (real or personal) used in trade or business and real property used in a trade or business
  • Copyright, literary, musical, etc held by the taxpayer who created it.
  • Accounts receivable in the ordinary course of business for services rendered or sale of property
  • A publication of the US government
  • Any hedging transaction (see 1221(b)(2))
  • Supplies consumed in the operation of a trade or business

Thus, because bitcoins do not fall within any of the above categories, they are capital gains to the extent that they are not used in a hedging transaction.  However, this would not be true if bitcoins are held as inventory in a trade or business, which might be the case if you mine bitcoins, nor is it true if bitcoins are classified as a self-created intangible asset like a copyright, which is unlikely but possible.  In either of those cases, bitcoin would be a non-capital asset and therefore subject to ordinary income tax rates.

 

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