The IRS recently ruled that transactions involving bitcoin and other virtual currencies may create a tax liability since digital currencies, like stocks, are treated as property for all U.S. tax purposes1. Generally, this means that capital gains rates, as opposed to higher regular tax rates, would apply as well as capital loss limitations. This has implications for transactions such as employee wages, payments to independent contractors, and reporting gain or loss on a sale or exchange.
Generally, the ruling imposes extensive recordkeeping rules to those handling and transacting virtual currencies. Employees and independent contractors who receive bitcoin for services would be subject to tax on receipt based on the fair market value of the virtual currency. In addition, where payment transactions would normally be subject to reporting to the IRS and payee, bitcoin payments exceeding $600 for rent, salaries, and wages could also require reporting.
Bitcoin, the best known of a growing number of digital currencies, is not backed by any country. It is created using a computer process and can be exchanged for dollars online.