Today IRS released guidance on Bitcoin and other virtual currencies. Essentially, virtual currencies (hereinafter Bitcoin) are treated like any other property that is not “real” (IRS’ term) currency under U.S. tax law. For most people, they can think of Bitcoin as being similar to stock.
Just like stock, you can realize a gain or loss while you hold Bitcoin. How it is taxed depends on how you hold it. For most people, the gain or loss will be capital gain or loss and reported on Form 8949 by individuals. The gain could be ordinary if the taxpayer holds Bitcoin for sale to customers just like most other inventory generates ordinary income.
When you successfully “mine” Bitcoin, the value on that date is includable in your income. You may wonder “How is the IRS going to know I received Bitcoin?” Truly, it does not matter if the IRS knows or not. You are filing your return swearing, under penalties of law, that your return is accurate.
Furthermore, IRS requires reporting of the payments made to employees and contractors so it will get a W-2 or a Form 1099 in many cases showing the value. If your employer pays you in Bitcoin then the value is added to your wages similar to how the value of stock is added to your wages. Same thing for a contractor, the value of the Bitcoin is added to your income and reported on any Form 1099 required to be filed by the payer.
If you would like to view all the FAQs on virtual currencies, download the PDF of Notice 2014-24.