IRS: Bitcoin is not currency

The federal government will tax digital money such as Bitcoin like property, not currency, the IRS said Tuesday in its first significant guidance on the virtual coin.

Although Bitcoin may operate like coin and paper currency and can be used to pay for goods and services, no country accepts it as "legal tender," the Internal Revenue Service said in its notice.

"Virtual currency is treated as property for U.S. federal tax purposes," the notice said. "General tax principles that apply to property transactions apply to transactions using virtual currency."

The guidance means that wages paid in Bitcoin are subject to federal income tax withholding and payroll taxes and must be reported on W-2 forms. Taxpayers must include the fair market value of Bitcoin payments for goods or services as part of their gross income, the IRS said. The fair market value would be calculated as the U.S. dollar value on the date payment was received.

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Bitcoin traders are subject to capital gains taxes if they are holding the digital money as a capital asset, like stocks or bonds, the IRS said.

On Tuesday, Bitcoin on the Coinbase exchange was selling for $587.35, up from $571.93 on Monday.

Bitcoin "miners," people who use special software to solve math problems and generate Bitcoin, must include the value of any Bitcoin they mine as part of their gross income, the IRS said. Miners must also pay self-employment taxes if they are operating as a Bitcoin-generating business, the IRS said.

Since Bitcoin is not a currency, exchanging Bitcoins for U.S. dollars would not be taxed as a foreign currency gain or loss, the IRS said.

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The IRS guidance "provides clarity for taxpayers who want to ensure that they're doing the right thing and playing by the rules when utilizing Bitcoin and other digita! l currencies," Sen. Tom Carper, D-Del., chairman of the Homeland Security and Governmental Affairs Committee, said in a statement.

Carper has held hearings on Bitcoin and has called on the IRS and other government agencies to address how federal tax and money-laundering regulations apply to virtual currencies.

Bitcoin, launched in 2009, is decentralized digital currency that is traded from person-to-person, rather than through banks, and has no issuing or regulating country.

The IRS in its guidance defined Bitcoin as a "convertible currency" that can be used as a "medium of exchange, a unit of account, and/or a store of value."