On Tuesday, the Internal Revenue Service announced that bitcoin and other virtual currencies will be treated as property for tax purposes, rather than as currency. This decision by the IRS is said to provide a potential boost for investors in bitcoin, but it will impose significant taxes as well.
Employees and independent contractors who are paid in bitcoin will be subject to tax according to the market value of the virtual currency, and employers will be expected to report such wages on a Form W-2 or Form 1099, respectively.
If bitcoin is being held for investment, gains will be treated as capital gains, like stock or other property, and will be subject to lower tax rates. Dealers in bitcoin, however, will have their gains taxed like dealers in other tangible property and generally treated as ordinary income.
Bitcoin “miners” and “mining” operations that comprise a business will also be required to pay taxes on payments received in virtual currency, as well as any appropriate self-employment taxes.
Source: Wall Street Journal.