Virtual Currencies/Bitcoins are treated as property by the Internal Revenue Service for US Federal taxation purposes.

When you buy or sell virtual currencies there are tax implications. All the basic tax principles that may apply to property transactions apply to transactions relating to virtual currencies like bitcoins. The following are the basic rules relating to virtual currencies as per the Internal revenue Service.

 

1. Payments made to independent contractors on 1099 and other service providers are taxable. Self-employment tax rules apply in general. All the payers must issue the form 1099.
2. Capital gains or losses: The character of the gain or loss from sale or exchange of virtual currency is basically dependent on whether it is considered as capital assets in the hands of the taxpayer.
3. W2 Wages: Any wages paid to employees using virtual currency like bitcoins are taxable to the employee. These must be reported by an employer on W2. They are also subject to federal income tax withholding and payroll taxes.

Other key points

1. Virtual currencies/bitcoins are treated as property for taxation purposes. Taxation rules that may apply to property also apply to virtual currencies. Check with a tax professional for more information.
2. Virtualcurrency is not treated as currency that would generate foreign currency gain or loss.
3. The taxpayer who receives virtual goods or services should include the fair market value of the virtual currency.
4. The basis of virtual currency that a taxpayer received is the fair market value of the virtual currency in US dollars as of the date of receipt.
5. Fair market value of the virtual currency as of a date of receipt or payment must be recorded. If the virtual currency is listed on an exchange, the fair market value is determined by converting the virtual currency into US dollars at the exchange rate.
6. Same rules as applied to sales or disposition of assets applies to virtual currency. Gain is recorded if the FMV (fair market value is in excess of the basis that has been calculated for the virtual currency. A loss is recorded if the FMV is less than the basis of the virtual currency.