Virtual currencies like bitcoin will be taxed like property — not currency, the Internal Revenue Service said Tuesday.
The IRS says bitcoin is not legal tender. You can’t use it to pay your taxes.
“The Internal Revenue Service (IRS) is aware that “virtual currency” may be used to pay for goods or services, or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but it does not have legal tender status in any jurisdiction,” the IRS wrote.
“Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies. …
“In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability,” the notice added.
If you receive wages in bitcoin, you have to pay taxes on it just like you would if you got paid in dollars. Or if you got paid in chickens.
IN all, the IRS issued a series of 16 questions and answers Tuesday to clarify the tax treatment of virtual currencies like bitcoin. In general, the IRS says it will apply the same rules that govern other barter transactions. (The entire noticed, including the Q&A, is available online.)
If you receive wages in bitcoin, they would be taxed at their fair market value at the time you were paid, the IRS said. If you use bitcoins to pay for goods or services, the vendor must report the income, using the fair market value of the bitcoins at the time of the transaction.
For investors, bitcoins will be treated like other commodities, the IRS said. If they increase in value, you have to pay capital gains taxes after you sell them. If they lose value, you can recognize a capital loss.
Created in 2009, bitcoin is an online currency that allows people to make one-to-one transactions, buy goods and services and exchange money across borders without involving banks or other third parties. Bitcoins have become popular with libertarians, tech enthusiasts and speculators.
Regulators worry about criminals using them to avoid detection.
In February, one of the largest bitcoin exchanges, based in Tokyo, filed for bankruptcy, adding to mistrust of the currency. Supporters say problems at the exchange were isolated.
