Bitcoins taxed as property, not currency, IRS says

WASHINGTON (Reuters) - Wading into a murky tax question for the digital age, the U.S. Internal Revenue Service said on Tuesday that virtual currencies such as bitcoin are to be treated, for tax purposes, as property and not as currency.

Putting bitcoin and other virtual currencies in the same category as stocks or bonds in some instances, the IRS said in a statement: "General tax principles that apply to property transactions apply to transactions using virtual currency."

Bitcoin is bought and sold on a peer-to-peer network independent of central control. Its value soared last year, and the total worth of bitcoins last week was about $7 billion.

Democratic Senator Tom Carper, who chaired a Senate committee hearing last year on bitcoin, said in a statement that the IRS guidance "provides clarity for taxpayers who want to ensure that they're doing the right thing and playing by the rules when utilizing Bitcoin and other digital currencies."

The IRS said that wages paid to employees in virtual currency are taxable to the employee and must be reported by an employer on a W-2 form, and are subject to federal income tax withholding and payroll taxes.

Other payments made using virtual currency to independent contractors or service providers are also taxable, it said.

Virtual currency is not to be treated as legal-tender currency to determine if a transaction causes a foreign currency gain or loss under U.S. tax law, the IRS said.

On other forms of gains or losses involving virtual currency, the IRS explained how to determine the U.S. dollar value of virtual currency and said taxable gains or losses can be incurred in related property transactions.

CAPITAL OR ORDINARY?

"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," the agency said.

If a taxpayer holds virtual currency as a capital asset - like stocks or bonds or other investment property - gains or losses are realized as capital gains or losses, the agency said.

Where virtual currency is not held as a capital asset, but rather as inventory or other property mainly for sale to customers in a trade or business, ordinary gains or losses are generally incurred, the IRS said.

Capital gains and losses are taxable and deductible at different rates and amounts than ordinary gains and losses.

Bitcoin "miners" who use computers to validate bitcoin transactions must include the fair market value of the virtual currency as gross income on the date of receipt, the IRS said.

"This is going to be unfavorable to bitcoin miners because they're going to have to include in income the fair market value of the virtual currency on the date they mined it," said William Lewis, a lawyer in Sunnyvale, California, who represents a start-up company creating a platform for virtual currencies.

"It's going to make life difficult for a lot of people who have been mining over the past year, who have to go back and see what the values were on those dates when they mined it."

(Editing by David Gregorio and Andrew Hay)

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