April 18, 2014
The Internal Revenue Service issued guidance March 25 on how U.S. federal tax laws apply to virtual currency that is convertible to real money.
Virtual currency, sometimes called cryptocurrency because of the computer algorithms used to create it, is not recognized as legal tender in any jurisdiction worldwide, the guidance notes.
However, it may be substituted for real currency in economic transactions that have tax consequences, the guidance says.
Therefore, the agency advises that for federal tax purposes, “virtual currency is treated as property.”
For example, income, payroll or self-employment tax and reporting rules will apply when compensating employees or independent contractors with virtual currency, the guidance says.
Additionally, selling or exchanging virtual currency may lead to a taxable gain or loss in income or capital assets, depending on how the taxpayer holds the property, the guidance says.
The guidance is available at http://1.usa.gov/1kpHSdq.