America's Internal Revenue Service (IRS) says that it will treat virtual currencies such as bitcoin as property, rather than currency, for tax purposes.
As widely anticipated, the ruling set out in an IRS notice (PDF) says that virtual currencies will be treated for tax purposes like stock or other intangible property.
If virtual currency is held for investment it will be treated as capital gains. With the top long term capital gains rate set at 20%, compared to the top ordinary income-tax rate of 39.6%, the ruling has been welcomed by bitcoin enthusiasts.
However, the rules could hamper the uptake of bitcoin as a form of currency because transactions will be subject to onerous record-keeping requirements. Paying for something with bitcoin could be a taxable event, requiring the buyer to work out the gain they have made and pay tax on it.
Wages paid using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
Meanwhile, bitcoin miners will also be subject to tax on payments they receive while people who mine as a trade or business will have to pay self-employment tax.