On Tuesday March 25, in what is really their first substantive ruling on Bitcoin, the Internal Revenue Service (IRS) has finally decided how the currency will be taxed. The IRS has concluded that Bitcoin will not be taxed as a currency, but rather:

For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.1

The IRS noted that although sometimes Bitcoin operates as a real currency, and is often used as a medium of exchange, “it does not have legal tender status in any jurisdiction.”2 Further, if individual Bitcoin holders are holding the currency as an investment, they are subject to capital gains taxes: “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.”3 The document expands a bit on capital gains:

A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets.4

Bitcoin miners are also subject to taxation. “when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.”5 And further, it Bitcoin mining is an individuals job, gains are subject to the self-employment tax:

If a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross in come derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income and are subject to the self employment tax.6

Although this is not really the ruling that the Bitcoin industry was looking for, at least there is now some sort of guidance. This ruling takes effect immediately, and “Taxpayers may be subject to penalties for failure to comply with tax laws. For example, underpayments attributable to virtual currency transactions may be subject to penalties, such as accuracy-related penalties.”7