IRS Rules Bitcoin Property Not Currency.

The IRS ruled that virtual currency, such as Bitcoin (BTC),  is not considered currency, but property for U.S. federal tax purposes. In other words, it does not have legal tender status in any jurisdiction. 

“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.

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. For a more comprehensive description of convertible virtual currencies to date, see Financial Crimes Enforcement Network (FinCEN) Guidance on the Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (FIN-2013-G001, March 18, 2013)

General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:

• Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
• Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
• The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
• A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

Really? Does the IRS really expect everyone who buys a cup of coffee with digital "currency," like BTC, to track capital gains? What a bureaucratic nightmare! However, I'm sure the IRS has no problem creating more administrative bureaus to deal with tracking virtual "currency" transactions. Not to mention, the burden on virtual "currency" users. But as Oscar Wilde said, "The bureaucracy is expanding to meet the needs of the expanding bureaucracy."

Links:

What the IRS Bitcoin Tax Guidelines Mean For You

Are the IRS Capital Asset Rules Realistic for Small Transactions?

Fiat Link - watch the world's currencies flow into BTC in real time.