The
Internal Revenue Service has issued a formal notice saying it can tax Bitcoin
transactions, calling it a property, not a currency. "General tax
principles that apply to property transactions apply to transactions using
virtual currency," the IRS said in a statement.
Wages paid to employees in
virtual currency are taxable to the employee and must be reported by an
employer on a W-2 form and are subject to federal income tax withholding and
payroll taxes, the IRS said. Payments to contractors in bitcoins will be reported
on a 1099.
"A
payment made using virtual currency is subject to information reporting to the
same extent as any other payment made in property," the IRS said.
So, while it's not a
"currency" in the legal sense of the word, it is still a virtual
currency. The IRS admits Bitcoin and other electronic tokens function like a
real currency. But the agency holds back from applying that sort of definition
because "but it does not have legal tender status in any
jurisdiction."
The IRS notice says
bitcoins must be valued at their "fair market value" at the time you
acquire it. This can be difficult as the price of a bitcoin changes all day
long. The IRS said taxpayers may rely on the going prices at online exchanges
for determining the fair market value.