On Tuesday, the IRS issued Notice 2014-21, in this Notice, the service announced that it would treat Bitcoin or other virtual currency as property for tax purposes. The IRS reasoned since the virtual currency is not regulated by any government, it would not be treated as currency.

As a result of the announcement, it is clear that when someone uses or receives bitcoins, it is as if the person (i) used property to pay for goods or services, or (ii) received property in payment for those goods or services. For example, if a person bought a particular amount of bitcoins for $100.00 and then used it to buy $200.00 worth of services, there would be a $100.00 gain on the transaction.

Some of the questions answered in the announcement include clarification that virtual currency is not treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss, that a taxpayer who receives virtual currency as payment for goods and services must include the payment in gross income for purposes of income and employment taxes, and that the basis of virtual currency received as payment for goods or services is equal to the fair market value of the virtual currency in U.S. dollars as of the date of the receipt. The fair market value is determined by an exchange rate, if one is available. The announcement also provides that if a taxpayer ‘mines’ virtual currency as a trade or business, any income earned is income subject to self employment taxes.