“Bitcoins will be taxed as property, not currency,” the IRS has made official in a policy statement when it comes to bitcoins and Federal taxes. No doubt this change will generate a very interesting media storm. Bitcoin exchange Kraken has submitted to a cryptographic audit for proof-of-reserves and passed, as well as become the recipient of $5 million in investment dollars. MtGox revealed the company has discovered 200,000 BTC in a forgotten wallet bringing the number of missing bitcoins to 650k down from 850k.

Bitcoin market value has been hovering in a band around $580. Having rested around $620 a week ago, dipping down around $560, but now is resting nearer to $585. As of the publication of this column, it’s still solidly set even after the interesting U.S.-based taxation news.

This and more in this week’s Bitcoin Weekly.

Bitcoins taxed as property, not currency, IRS says

The IRS has revealed new information about how the Federal taxation entity will tread bitcoin and the agency said Tuesday that it will treat bitcoins, and similar virtual currencies, as property for U.S. tax purposes. This means bitcoins are not considered currency for taxes but instead a commodity.

“The notice provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency,” according to an IRS news release announcing the change Tuesday.

CNBC.com has a very short report on the matter.

“The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer,” the agency said as quoted by Reuters.

This means that if bitcoins (or other virtual currencies) are treated by a person as a stock or bond, then that person’s activity with the virtual currency will be subject to capital gains losses and gains taxes. If a person keeps the virtual currency as inventory or other property mainly for sale, then ordinary gains and losses are incurred generally, the IRS said.

The really stunning takeaway that will become something of a sticking point involves bitcoin miners—who earn the virtual currency while validating bitcoin transactions. The IRS said that miners must report the fair market value of the virtual currency as gross income on the date of receipt.

“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 quoted in the Reuters article, 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.”

Kraken BTC exchange cryptographically verified audit, passed

US-based Bitcoin exchange, Kraken, has decided to show its customers that it means business by submitting to a cryptographically verified account audit of its bitcoin holdings. The entire process is outlined here as a “proof-of-reserves” audit. To make a long, procedural story short: Kraken passed with flying colors.

This act comes in the wake of MtGox’s demise and the now-defunct exchange “losing” thousands of customer bitcoins. Many bitcoin holders who participate in exchanges to trade virtual currency for cash have long wondered if exchanges are properly keeping account balances on hand or if there’s a variation of fractional reserve going on behind the scenes.

By submitting to, and passing, a proof-of-reserves audit, Kraken is showing its customers that even if the business behind the exchange becomes unstable, users will still be able to pull out all their holdings.

“Kraken holds full reserves, and we employ an independent, cryptographically-verified audit in order to prove to third parties, including our customers, that customer funds are properly held,” writes Kraken in the audit document. “Transparency and independently verified audits are critical to ensure that companies hold full reserves of customer funds.”

If anything, it raises Kraken to a level above a fly-by-night operation, which is a fear that many bitcoin holders have about the current exchange landscape. While MtGox used to be the exchange-of-note, it was also one of the least secure (although seemed to be constantly improving) and as time goes on more exchanges arrive and fall with little attention to the damage that’s done to traders on the platform.

If you have funds on Kraken and want to verify your funds, instructions are included on the audit page.

Also worth noting is that Kraken has also just received $5 million in investments. Right now, Kraken represents only about .03% of market trading volume—way behind Bitstamp, Bitfinex, and BTC-e who make up 94% of the market together—but that might change if Kraken can show a stable, solid platform for trading.

MtGox and the saga found 200,000 bitcoins

Bankrupt and defunct, Tokyo-based MtGox is still making news (and ripples) with the revelation during those bankruptcy proceedings that the exchange found over 200,000 bitcoins in a forgotten wallet—a number of coins currently valued over $116 million dollars.

The coins had been dredged up from a cold wallet that MtGox CEO Mark Karpeles is quoted saying, “it thought it no longer contained bitcoins.” You can see the official disclosure document here (PDF, in English and Japanese.)

This escapade continues the smoking crater left of MtGox after the exchange announced that it had lost track of over 850,000 bitcoins—the 200,000 found brings that number down to 650,000 missing.

The situation continues to unfold, as does the bankruptcy proceedings for MtGox. For more details on the discovery of the forgotten wallet and the 200k bitcoins therein, AFP has the rest of the story.

Japanese officials have said they are closely monitoring MtGox’s bankruptcy proceedings, as they try to get a handle on how and why the exchange imploded.

“The reasons for their disappearance and the exact number of Bitcoins which disappeared is still under investigation,” MtGox said.

Since putting up a page allowing traders on the platform to see their own account balances (via a web form) there has been little other news of the fate of the now-defunct exchange. SiliconANGLE will continue to deliver as the story unfolds.