IRS to treat bitcoin as property, not currency, for tax purposes

LOS ANGELES >> The Internal Revenue Service said Tuesday that bitcoin would be treated and taxed as property, a decision that is part of wider efforts to bring more oversight to the controversial digital currency.

In its first big ruling on bitcoin, the agency noted that "it does not have legal tender status" and will be taxed under codes that apply to property transactions.

That means wages paid to workers in bitcoins will be subject to federal income and payroll taxes. Those who "mine" virtual currencies–or create new bitcoins by solving complex math problems–will have to report their earnings as taxable income.

Bitcoins can also be treated as capital assets, regulated under the same rules that govern stocks and bonds, the IRS said.

The agency’s decision was applauded by Sen. Thomas Carper, D-Del., who has called on the U.S. government to lead the way for regulating bitcoin and other virtual currencies.

The guidance "provides clarity for taxpayers who want to ensure that they’re doing the right thing and playing by the rules when utilizing Bitcoin," Carper said in a statement Tuesday.

Bitcoin, which has gained a following among ordinary users and companies alike, has attracted scrutiny from lawmakers in several countries around the world. The currency is not controlled by any government or central bank, and has lately been at the center of several controversies that critics say highlight the need for more oversight.

Mt. Gox, a bitcoin exchange that was once the world’s largest, filed for bankruptcy protection in February after losing 850,000 bitcoins worth more than $450 million (a big chunk was later recovered).

Bitcoin was also the currency of choice for users of Silk Road, an online marketplace that sold drugs, fake passports and other illegal goods and services. The founder was arrested last year and later indicted on multiple charges, including money laundering.

A Newsweek magazine story this month named Dorian Satoshi Nakamoto of Temple City as the creator of bitcoin, an allegation that triggered a media frenzy and car chase through the streets of downtown Los Angeles. Nakamoto has repeatedly denied any involvement in the currency.