The IRS released guidance on March 25 that Bitcoins and other virtual currency should be treated as property for U.S. federal income tax purposes, and not as a currency. In addition to the determination that virtual currency is property, the IRS notice made clear that some of the typical rules on transactions in property apply to virtual currencies. For example, the recipient of virtual currency as payment for goods or services is treated as having received income equal to the fair market value of the virtual currency. In addition, under the guidance, payments made in virtual currency are subject to information reporting rules and backup withholding. The notice also provides that “mining” virtual currency can be a trade or business, and gross income is realized when the virtual currency is mined (rather than when disposed).
Because of the significant fluctuations in value, there are many individual taxpayers with virtual currently losses that, under this guidance, will be limited in their ability to use their capital losses; on the other hand, many individual taxpayers with significant gains will benefit from capital gains treatment afforded to virtual currency transactions under the guidance. For virtual currency users who were attracted to the anonymity of virtual currency, the information reporting requirements may make virtual currency less attractive. For anyone who has ignored the tax treatment of their past virtual currency transactions or who utilized a tax treatment different from the guidance, amended returns may be required. There is no specific penalty relief in place, although the guidance suggests that the IRS will seriously consider reasonable cause arguments.
You can get more details on the guidance in our Legal Alert
Read the IRS notice