Tax Law Blog

IRS: Bitcoins Are Property, Not Currency

In guidance issued on Tuesday, March 25, 2014, the IRS warned that virtual currencies, such as Bitcoin, are to be treated as property and not as currency for tax purposes.

"General tax principles that apply to property transactions apply to transactions using virtual currency," the IRS said in the guidance statement.

Bitcoin, which is frequently in the financial headlines, is a computer-driven online money system. Bitcoin users have been able to transact and trade with little governmental oversight. Learn more about Bitcoin here.

The IRS’s guidance means that Bitcoin owners may be subject to capital gain taxes upon its sale or exchange, just like a holder of common stock or other securities. For example, if an individual acquired Bitcoin with a value of $20, which had appreciated to $40 upon its sale, the individual would pay capital gains tax on the $20 gain. In addition, wages paid to employees in Bitcoins would be taxable under the rules of Internal Revenue Code Section 83, which generally requires income and employment tax withholding and payment as of the date of the employee’s vesting in the Bitcoin. Independent contractors paid in Bitcoins would need to pay self-employment tax.

The IRS’s guidance makes one thing clear - virtual currencies, like Bitcoin, do not currently have legal tender status in the U.S., at least in the IRS’s opinion.

This is a fascinating area that we will track closely in the upcoming months. 

Categories: News & Events, Tax