IRS says bitcoins are property, not legal tender

In the middle of tax season, the Internal Revenue Service has finally made it clear about its classification of bitcoin and other digital currencies: it’s property and not a currency.  This means the virtual currency would be subjected to tax akin to ordinary income or as an asset for capital gains taxes.

The IRS confirmed in a guidance notice Tuesday that it would not look at bitcoin as a legitimate currency or legal tender, though the cryptocurrency does pay for goods and services similar to traditional fiat money.

“Virtual currency is treated as property for U.S. federal tax purposes,” the notice said from the tax collection agency. “General tax principles that apply to property transactions apply to transactions using virtual currency.”

If employers pay their workers’ wages in bitcoin then that would be subjected to federal income tax withholding and payroll taxes and must be reported on W-2 forms. Businesses accepting bitcoin as payment for goods and services would be taxed based on a a market value of the bitcoin payment.

Bitcoin traders that hold the virtual currency similar to bonds or stocks would be treated as a capital asset. Miners are required to include the value of the bitcoins as gross income, while self-employed bitcoin operators must pay self-employment taxes as if they’re operating a bitcoin business.

“[This] provides clarity for taxpayers who want to ensure that they’re doing the right thing and playing by the rules when utilizing Bitcoin and other digital currencies,” Delaware Democratic Senator  Tom Carper, chairman of the Homeland Security and Governmental Affairs Committee, said in a statement.

It now appears the federal government is beginning to crack down on bitcoin. We reported that Treasury Secretary Jack Lew has hinted at warnings about regulations being applied to the bitcoin economy.

At the time of this writing, bitcoin is trading at just under $590.

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