Its status has been up in the air for some time now, but today the IRS provided guidance on the tax treatment of online currency such as Bitcoin. The official position is that virtual currency is not to be treated as legal-tender currency, but should be treated as property instead. Bitcoins, therefore, should be reported and taxed as ordinary income, or as assets subject to capital gains, as the case may be.
[V]irtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency.
Therefore, in real world applications, employees who are paid in virtual currency must pay taxes on that income just as they would pay taxes on dollars. And an employer would have to withhold taxes, report these wages on a W-2, and comply with payroll tax laws. And, of course, a 1099 is required for the self-employed who are paid in Bitcoin.
Perhaps of greater concern to some Bitcoin users around the world is the impact this IRS notice will have on “miners” (computer geeks who compete to unlock new Bitcoin by cracking codes). If they want to be 100% legit, they will have to go back and determine how much Bitcoin they mined throughout the year, its fair market value on the date it was mined, and include it in their income.