The IRS released a ruling Tuesday, announcing that Bitcoins and other “virtual currencies” are to be treated as property when filing taxes. The ruling represents the IRS’ first official stance on virtual currencies with regard to taxes.
This news comes after the collapse of one of the Internet’s largest Bitcoin exchanges last month. The unexpected shutdown of Mt. Gox shook the Bitcoin community and threatened to undermine confidence in the security of virtual currency.
The IRS acknowledges that virtual currency is used to pay for goods and services just like regular currency, but says, “it does not have legal tender status in any jurisdiction.”
The IRS’ concern is with “convertible currency,” that is, virtual currency that has an equivalent in or acts as a substitute for analog currency. “In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.”
According to the ruling, “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”
The IRS’s announcement includes a sixteen question FAQ to help individuals and tax preparers better understand what the ruling means in terms of filing.