IRS Clarifies that Bitcoin and Other Virtual Currencies Are Treated as Property for U.S. Federal Tax Purposes

Bitcoin is a virtual currency whose “supply” is determined by a preset computer algorithm and whose value is determined based on trading on dedicated exchanges.  (One notable Bitcoin exchange – Tokyo-based Mt. Gox – filed for bankruptcy protection in February of this year, claiming that 850,000 Bitcoins, worth about $500 million, were “stolen” by computer hackers.)  Hedge fund managers, manager principals and other types of investment managers (notably, venture capital fund managers) are interacting with the Bitcoin ecosystem in various ways.  For such managers and persons, a recently-issued IRS notice helps clarify the application of general tax principles to transactions using virtual currency.  For a related discussion of the role of different currencies in hedge fund structuring and marketing, see “Local Currency Hedge Funds Expand Marketing and Investment Opportunities, but Involve Currency Hedging and Other Challenges,” Hedge Fund Law Report, Vol. 3, No. 1 (Jan. 6, 2010).

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