Among the implications of its position considered by the treasury department in new guidance (6-page / 42KB PDF) are the tax treatment of wages paid to employees in virtual currency, and information reporting requirements for virtual currency payments. Transactions will be subject to the same "general tax principles that apply to property transactions", such as those that govern trading in stocks or barter, the guidance said.
"In some environments, virtual currency operates like 'real' currency – i.e., the coin and paper money of the United States or of any 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," the IRS said in a statement.
Earlier this month, the UK's HM Revenue and Customs (HMRC) published its own guidance stating that it would treat virtual currencies as 'payment services' rather than currency for the purposes of the country's tax laws. However, its position may change depending on future statements from the European Commission.
According to the IRS notice, those who sell or exchange virtual currency will have to account for gains and losses from that sale or exchange depending on whether the virtual currency is a 'capital asset' or an 'ordinary asset'. Payments in bitcoin will be valued at the "fair market value in US dollars" on the date that the payment is received.
Bitcoin is a digital asset with monetary value, but it is not currently recognised as an official currency anywhere in the world. Some retailers accept payment by bitcoin for goods and services but most traders, especially in the EU, have not yet put systems in place to accept them in transactions.
In its guidance, the IRS said that it was "aware" that 'convertible' virtual currencies, such as bitcoin, were being used in the US to pay for goods and services, or were being held for investment purposes. Convertible virtual currencies are those that have an equivalent value in real currency or that act as a substitute for real currency. Convertible virtual currencies used to pay for goods or services should be valued at the fair market value in US dollars on the date of receipt, which should be determined with reference to an exchange on which the exchange rate is "established by market supply and demand".
According to the note, the usual rules relating to capital gains and losses will be applied on exchange of virtual currency for other property. This means that if the fair market value of the property received is worth more than the adjusted value of the virtual currency, the person making the trade has a taxable gain. Similarly, the person making the trade would have a loss if the fair market value of the property received in exchange was less than the adjusted value of the virtual currency. The person trading the bitcoin would also have to calculate the change in value of the bitcoin between the date it was acquired and the date that it was spent. Capital losses over the course of a tax year can be subtracted from capital gains in the same tax year in the usual way.
Employers that pay staff with bitcoin will have to report those wages in the same way as any other payment made with property, and bitcoin income will be subject to the normal federal income withholding and payroll taxes, according to the note. Reporting requirements apply to transactions in which property valued at $600 or more is exchanged, and the same reporting requirements will apply to bitcoin transactions.
When bitcoins are successfully 'mined', or created, the person mining the bitcoin will obtain the fair market value as income, according to the note. Those who mine virtual currencies as a trade or business will also be subject to self-employment tax, the IRS said.
The guidance set out in the note applies both immediately and to past transactions, according to the IRS. This means that taxpayers could potentially be penalised for having treated a virtual currency transaction in a way inconsistent with the contents of the note before it was published. However, the IRS said that relief from penalties may be available to taxpayers who underpaid tax or did not file tax returns if they could show "reasonable cause" for their actions.