IRS: Bitcoin Will Be Taxed as Property, Not Currency

Bitcoin holders, be warned for tax season: The Internal Revenue Service will treat the virtual currency as potentially taxable "property."

The IRS issued a statement about virtual currencies on Tuesday, in which the agency made clear that bitcoin isn't flying below the radar when it comes to taxes.

Instead, the IRS said, bitcoin and all "virtual currency is treated as property for U.S. federal tax purposes."

Essentially, the IRS' ruling means virtual currency is subject to the same taxes as assets like stocks or other intangible goods. (The agency chose to treat it as property, not currency, because it is not "legal tender.")

For example, employers who pay in virtual currency must report it on tax forms -- and employees are still subject to federal income tax and payroll tax. Independent contractors paid in virtual currency must pay self-employment and other taxes. And if the value of bitcoin increases, holders could have to pay a capital-gains tax.

Meanwhile, people who "mine" the digital currency -- that is, create bitcoin with a computer that solves a complex algorithm -- as a "trade or business" would also have to pay self-employment tax.

The IRS guidelines are effective immediately, and they also apply to past tax-filing years. But penalty relief may be available for people who can prove "reasonable cause" for underpaying taxes.