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How does the IRS treat Bitcoin?

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How does the IRS treat Bitcoin?

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In March 2014, the IRS issued Notice 2014-21, which addressed its treatment of Bitcoin transactions and exchanges. The notice provided a brief guide to the underlying tax and reporting issues surrounding virtual currency.

The IRS treats Bitcoin and other virtual currency as property, not currency. Its rationale behind such treatment is due to the fact that there is no government backing or regulation behind virtual currency. Since virtual currency does not have legal tender status in any jurisdiction, it cannot be treated as currency.

Due to its treatment as property, if a person or entity uses bitcoins to make purchases, the exchanges would trigger a gain or loss for both the recipient and the spender. For example, if someone bought a bitcoin for $100 and then later spends it when the bitcoin has risen in value to $150, he or she would realize a $50 gain, a reportable taxable event.

Another example, if a person receives bitcoins as payment for goods or services, such as U.S. based “miners” as aforementioned, then he or she must include the fair market value of the bitcoins in his or her gross income, as of the date of receipt. The fair market value at the time of receipt also represents the stand-alone basis of each bitcoin. Later, if the person decides to spend the bitcoins, he or she would be taxed on the gain or loss occasioned by a change in the bitcoin value between the date of receipt and the date of expenditure.

Many people have treated bitcoins as an investment, rather than using them for buying and selling goods and services. Either treatment requires that they must keep records of their transactions in order to report the gains and losses upon sale.