IRS to Treat Bitcoin as Property for Tax Purposes

Bitcoin’s vagabond days may be drawing to a close.

The IRS on Tuesday issued a notice saying it would treat virtual currency such as bitcoin as property for federal tax purposes. “General tax principles applicable to property transactions apply to transactions using virtual currency.”

Bitcoin users who have operated largely without government oversight since the digital currency’s introduction in 2009 now have to think about tax implications and reporting.

They may be subject to capital gains taxes, in contrast to individual traders in international currency markets, who treat gains and losses as real income when filing tax returns.

The bitcoin decision has a number of implications laid out by the IRS in a set of frequently asked questions.

Wages paid to employees in virtual currency are taxable to the employee. An employer must report these on a W-2 form. And they are subject to federal income tax withholding and payroll taxes.

In addition, payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply. Payers normally must issue Form 1099.

The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset — like stocks, bonds and other investment property — in the hands of the taxpayer.

If it is, a taxpayer generally realizes capital gain or loss.

If the sale or exchange of virtual currency is not a capital asset in the taxpayer’s hands—e.g., inventory and other property held mainly for sale to customers in a trade or business—the taxpayer generally realizes ordinary gain or loss.

In addition, payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.