The Internal Revenue Service has taken the position that virtual currency, such as bitcoin, is property. An IRS notice said that virtual currency, which is not recognized as legal tender anywhere, is subject to general rules for property transactions for federal tax purposes.Virtual currency transactions must be reported in U.S. dollars and taxpayers must determine the fair market value as of the date of payment or receipt, according to a list of frequently asked questions issued by the agency.
Among other positions taken by the IRS: wages paid to employees in virtual currency must be reported employers on Form W-2 and are subject to federal income tax withholding and payroll tax. Similarly, payments to independent contractors are taxable.
The IRS says whether a gain or loss stems 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 also subject to information reporting to the same extent as any other payment made in property.