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Update: new guidance issued for taxing virtual currency

In our last post we discussed some different possibilities for how the Internal Revenue Service might tax the virtual currency known as bitcoin. The new type of currency has generated a lot of controversy and exists in a legal grey area because people are trading it for goods and services, holding it as an investment, and producing it as a business, but it is not recognized as a currency by any sovereign nation.

As we noted in our last post, this left bitcoin holders with a few choices on how to interpret their bitcoins for tax purposes, some with more convincing arguments than others. Now the bulk of the guesswork has been taken out of this process as the IRS has finally issued new guidance on how taxpayers should handle their bitcoins.

First and foremost bitcoins will be treated as property. This means that someone who holds bitcoins as an investment will pay capital gains tax, just as if they were holding other tangible assets. It also means that businesses that accept bitcoins in exchange for goods or services will have to declare the value of the bitcoins on the day of the transaction as a part of their gross income. For those who mine bitcoins

This guidance does not completely flush out all possible tax situations for people who use or invest in bitcoins, so it is important for people with specific questions about the best way to handle bitcoins to seek individualized advice from an experienced tax law professional.

Source: USA Today, "IRS: Bitcoin is not currency," Donna Leinwand Leger, March 25, 2014.

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