Today, March 25, 2014, the Internal Revenue Service (IRS) released how Americans should treat their ownership of bitcoins. The IRS is going to treat bitcoins, and any other virtual or digital currency, as property and not as currency. The full explanation can be found here at the IRS website in PDF format.
So, those who own bitcoins will owe taxes on the value of the bitcoins when sold much like one would be taxed on stock ownership. That said, those receiving bitcoins as a form of payment for their labor would receive a W-2 from their employer and still be subject to payroll and withholding taxes. Transactions above $600 in any tax year would be subject to normal IRS reporting requirements, including 1099s for independent contractors.
Those who "mine" bitcoins will also be on the hook for taxes as the IRS is defining "mining" as a trade or business subject to self-employment taxes. Mining bitcoins is the process of using computer hardware to do mathematical calculations for the bitcoin network to confirm transactions and increase security. As a reward for their services, bitcoin miners can collect transaction fees for the transactions they confirm, along with newly created bitcoins.
Bitcoins are a private peer-to-peer way to handle transactions digitally and are widely seen as being born from libertarian-leaning individuals. The virtual currency has been highly controversial and has had a roller coaster ride when priced against the U.S. Dollar. Use this video tutorial to learn what bitcoins are and how they are used.
There is even an entire community utilizing nothing but bitcoins called Galt's Gulch in Chile. In America there are thousands of retailers who have been accepting bitcoins for payment, most notably Overstock.com as well as real estate transactions throughout the world.
It is unclear how the IRS plans to enforce bitcoin transactions as most transactions are private transactions and often untraceable. The IRS may need to settle for public transactions, those willing to come forth with the transactions and divorce proceedings when one spouse spills the beans, or in this case bitcoins, on the other.
In other bitcoin news today, tech guru Marc Andreesen said today in a Tech Crunch article, "“My prediction is that the libertarians will turn on Bitcoin.”