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Wading into a murky tax question for the digital age, the U.S. Internal Revenue Service said on Tuesday that virtual currencies such as bitcoin are to be treated, for tax purposes, as property and not as currency.
Putting bitcoin and other virtual currencies in the same category as stocks or bonds in some instances, the IRS said in a statement: "General tax principles that apply to property transactions apply to transactions using virtual currency."
Bitcoin is bought and sold on a peer-to-peer network independent of central control. Its value soared last year, and the total worth of bitcoins last week was about $7 billion.
It's a rule aimed more at the large/institutional investors (think Wall Street banks or Winklevoss twins pumping large cash amounts into Bitcoins) - in these cases, the IRS had to have a rule for how to tax those bitcoin holdings.
For the small time BTCer, the IRS has no way of knowing how much BTC you have, at least not until you try to cash it out into a fiat currency.
Some point in the trade chain of bitcoin and other virtual currencies involves liquidation to fiat currency. The point of trade for currency is where I believe the IRS will step in for their share. It seems that virtual currency are classified as unrealized capital gains the same as stocks. Taxes aren't levied until the investment is liquidated for realized capital gains.
Since the IRS will have a problem determining whether the capital gain is long term or short term, they will probably tax it at the higher of the two tax rates, the short term rate.edit on 25-3-2014 by eManym because: (no reason given)