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IRS Delivers Knock Out Blow to Bitcoin

Johnathan Millet
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Bitcoin prices have been extremely volatile over the past year. The virtual currency soared 1100 percent from the beginning of the 4th quarter through Christmas, but recent news from the Internal Revenue Service might be the blow that knocks the virtual currency back into reality.

The Internal Revenue Service (IRS) announced that Bitcoin and other virtual currencies are considered property, and not currency. That means those who own Bitcoin will now have to pay taxes on the income they gain, similar to the way taxes are levied on a stock. Investors will not be able to deduct a loss if Bitcoin loses value, which is the way many currencies are treated.

The treatment of Bitcoin was previously up in the air as the IRS was unsure how to approach virtual currencies. The IRS said, “In some environments, virtual currency operates like ‘real’ currency, but it does not have legal tender status in any jurisdiction.” The IRS ruling goes into effect immediately and failure to comply couldresult in fines.

One of the benefits for those who are looking at Bitcoin as an investment is that by labeling virtual currencies as property, investors who hold the virtual currencies for more than one year will be able to claim the profits as capital gains, which has a lower rate than ordinary income. For those who plan on using the virtual currency as a medium to pay for everyday items, they will be forced to pay ordinary income for any gains seen for a period of less than one year.

The news has helped push Bitcoin prices below support levels made by a horizontal trend line created from attaching the lows in December to the lows in February that came in near 550. Given the recent run up in prices, it is hard to find a technical support level.

Momentum on the virtual currency as reflected by the MACD (moving average convergence divergence) index is negative as the spread (the 12-day moving average minus the 26-day moving average) crossed below the 9-day moving average of the spread. The index moved from positive to negative territory confirming the sell signal.

For those who are looking for a silver lining the Bitcoin prices look to be oversold. The relative strength index (RSI) which is an oscillator that measures momentum as well as overbought and oversold levels is printing near 29, which is below the oversold trigger level of 30 and could foreshadow a correction in Bitcoin prices.

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