Question: I sold some bitcoins this year, how should I report? I also bought some equipment using bitcoin. Do I need to report the purchase?
Answer: The important thing to remember is that Bitcoin is treated as property, not currency, for U.S. federal tax purposes.
General tax principles that apply to property transactions apply to transactions using bitcoin. Among other things, this means that: A taxpayer who receives bitcoins as payment for goods or services must, in computing gross income, include the bitcoins’ fair market value. Wages paid to employees using bitcoins 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.Payments using bitcoins made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.The character of gain or loss from the sale or exchange of bitcoins depends on whether the bitcoins is a capital asset in the hands of the taxpayer. A payment made using bitcoins is subject to information reporting to the same extent as any other payment made in property.
When bitcoins is sold, it is treated as property. If the property is a capital asset like stocks or bonds or other investment property, gains or losses are realized as capital gains or losses.If the property is inventory or other property mainly for sale to customers in a trade or business, then ordinary gains or losses are generally incurred. Bitcoins is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes. For U.S. tax purposes, transactions using bitcoins must be reported in U.S. dollars. Therefore, taxpayers must determine the fair market value of bitcoins in U.S. dollars as of the date of payment or receipt.
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Circular 230:The articles are for general information only. In accordance with IRS Circular 230 they are not considered tax opinions for purposes of relying on such statements in any challenge of the reporting of the above transaction by the IRS. If a full tax opinion is required certain procedures must be met . Also there is a significant cost for a full tax opinion to meet the requirements of Circular 230.