The IRS previously admitted it wasn't sure how to tax Bitcoin, but today it's reached a decision. Bitcoin and other virtual currencies are considered property, not currency, according to a notice posted today. That means Bitcoin owners may have to pay taxes on the income they gain as Bitcoin increases in value, and may be able to deduct a loss if Bitcoin loses value, just as if Bitcoin were a stock.
"In some environments, virtual currency operates like 'real' currency," the IRS writes, "but it does not have legal tender status in any jurisdiction." Therefore, "virtual currency is treated as property for U.S. federal tax purposes" and "general tax principles that apply to property transactions apply to transactions using virtual currency."
The ruling takes effect immediately and failure to comply will result in fines. However, the agency says it will allow leniency for failure to file in the past if there is "reasonable cause." (Presumably the absence of a rule would qualify.)
The ruling takes effect immediately and failure to comply will result in fines
Virtual currency owners who regard their holdings as an investment will be happy to know they can now take advantage of the capital gains tax, which allows investors to pay a much lower percentage on holdings sold after a year and also deduct up to $3,000 in losses. But those who use Bitcoin and other virtual currencies as an actual medium of exchange may be encumbered by the additional paperwork.
Virtual currency sellers are not eligible for capital gains. Virtual currency miners will report their earnings as taxable income, and will be subject to payroll taxes if they mine as part of a business.
Chris Welch contributed reporting.